Business confidence surges in August to best level in 5 years (Update 1)

A jump in construction industry confidence led a further increase in business sentiment in August, the latest National Bank Business Outlook Survey indicates. A net 34% of respondents to the survey said they expected to see better times over the next year, up from net 18% in July. (Update 1 includes ASB comment on Official Cash Rate.) A net 64% of respondents from the construction industry said they expected better times in the year ahead, with that net figure made up by 64% made of positive comments and no expectations for deterioration. This was from a net 52% in July and the best result since the early 1990s. Net confidence in the residential construction sector jumped to 48% from 24% in July. As well as this, a net 26% of all respondents said they expected better times in the year for their own business, up from a net 13% in July. This was the best result in 5 years and indicated a GDP growth rate of 3%, National Bank economist Cameron Bagrie said, adding that the composite growth indicator from the survey was "more sedate on the recovery, but still well in positive territory." "Why the continued jump in confidence? There are a host of candidates ranging from rejuvenated confidence towards the housing market and spill over perception into the wider economy, improving global prospects, recovering equities and even the honeymoon period that the Government seems to have settled into," the National Bank said. "On top of that, we would include relief. After 18 months of recession, surely things can only get better! If we can navigate through the largest financial crisis in 80 years, with the unemployment rate rising to 6 percent and house prices only falling 10 percent, then bring it on! Damn the doomsayers, grab your wallet, we're going shopping." The agriculture sector remained downbeat on the year ahead, although the August survey showed better results than in July. A net 9.4% of agriculture respondents said they expected general business conditions to deteriorate over the year, from net 15% last month. Agriculture was also the only industry to expect a fall in real profits in the year ahead, with net 33% expecting further profit deterioration, from net 43% in July. Following the results, ASB economist Jane Turner said there was still a possibility the Reserve Bank would cut the OCR next week, but ASB still saw it unlikely that the Reserve Bank would lift interest rates as early as the market implies. Market indications are for the Reserve Bank to raise the Official Cash Rate above 2.5% by as early as March 2010, despite its stated expectation for the OCR to remain at or below its current level until the latter part of 2010.

Business confidence has continued to recover, with the key own activity measure now back to an average level. The survey readings point to the economy growing again in Q4 if not Q3, reinforcing that a prolonged recession is over. However, the robustness of the responses may incorporate a bit of a "phew" factor: we judge that 2009 is too soon to see economic growth returning to long-run average levels. There will still be challenges for export sectors over the next year given the extent of economic pain being felt elsewhere. There is still a possibility the RBNZ cuts the OCR next week, but at the least we still see it unlikely that the RBNZ will be lifting interest rates as early as market pricing implies.