Business confidence slips in March but remains 'elevated' despite the drought, ANZ survey suggests

Business confidence waned in March but still held at an elevated level with only a mild impact from the drought visible so far, says ANZ chief economist Cameron Bagrie.

According to ANZ's monthly business confidence survey,  a net 35% of businesses expect general business conditions to improve over the year ahead. That's down from 39% in February.

"That’s well above the historical average of +8," Bagrie says. "The service sector, which accounts for nearly two-thirds of GDP, is now the most optimistic, overtaking construction. Agriculture remains the laggards, with confidence slipping into the red."

It's not surprising to see a confidence dip in March, adds Bagrie.

"Confidence usually falls in March, as the summer glow wanes and the reality of work reasserts. After accounting for seasonality, March showed a rise in confidence, which when set against a backdrop of rising angst towards an extended drought is an encouraging sign."

A net 32% of firms are optimistic about their own business’s prospects, which is down 6 points month-on-month, but is above the long-term average of 26%.

The survey detected only a "mild" drought impact thus far.

"Confidence across Northland literally tanked. Conversely, a number of the other drought associated regions (Waikato, Hawke’s Bay) showed few clear patterns across surveyed measures," says Bagrie.

"Our combined composite growth indicator - combining indicators from both the Business Outlook survey and Consumer Confidence (a survey we also produce) - is flagging 2.8% growth by the middle of the year. That’s solid stuff amidst extremely dry conditions."

Taranaki emerged as the most confident of the regions, topping firms’ own activity expectations, expected profitability, employment and investment intentions. Bagrie attributes this to the expected ramping up in oil and
gas exploration, which by historical standards "looks bigger than Ben-Hur" over the coming year.

"White and black gold are a potential critical part of New Zealand’s economic prosperity, and Taranaki has been a benchmark for balancing competing challenges for both at the same time."

Other features of the March survey are:

Profitability expectations softened marginally from +14 to +13.

Employment intentions eased from +11 to +8. The employment scene remains dominated by the construction industry with a net 45 percent expected to lift staffing levels.

Investment intentions eased from +16 to +15.

Residential investment intentions (+46) and commercial construction intentions (+20) remain elevated.

Export intentions continue to languish though this month saw them bounce of lows, rising from +14 to +15. Confidence across the export community continues to be suppressed by a high NZ dollar. That’s not going
away any time soon, though we note the easing in the NZD/AUD to sub 80 cents: this is a critical cross rate for the manufacturing and tourism sectors.

Pricing measures show some signs of picking up (inflation expectations were unchanged though pricing intentions rose from +18 to +22). Neither portend of the inflationary genie coming out of the bottle though the construction centricity to pricing behaviour (inflation expectations +2.6 and pricing intentions +36) bears watching.

Meanwhile, Bagrie notes this month’s survey represents its 25 year anniversary. It was formerly known as the National Bank Business Confidence Survey.

"Over the 25 years the net balance of the General Business Confidence question has ranged from a post sharemarket crash low of -69, to a high of +81 in February 1994, when New Zealand was in the midst of the strongest period of economic growth of the past quarter of a century," says Bagrie.