Business confidence stronger as builders most confident in 10 years (Update 1)

The National Bank Business Outlook survey of business confidence has found a net 6% of respondents in June expected general business conditions to improve over the next 12 months, up 4 percentage points on May. (Updated to include more detail, link to full report, reaction from BNZ, link to all our confidence charts) "Leading the charge is the construction industry with a net 46 percent expecting better times ahead, the highest reading since 1999. Conversely, sentiment within the agriculture sector slipped and it's hard to go past the reality check that a dairy payout forecast of NZ$4.55 / kg milk solids will be having," National Bank said. Firms' own activity expectations continued to nudge higher as well. A net 8 percent expected better times ahead. "These movements are welcome. The firms' own activity expectations reading, by itself, is now pointing to positive growth. But, like last month, the dog still has fleas. Profit, employment and investment intentions remain very weak, barely budging on the month prior. A net 24 percent of firms expect lower profits." Profit expectations was up in retailing and manufacturing, but down in agriculture, construction and the service industries. Employment intentions fell marginally. The labour market outlook remains particularly poor with a net 17 percent expecting to hire fewer staff in the year ahead, down 1 percentage point on May. A net 6 percent of firms expect to be investing less, again down marginally from the previous month. "Recovery will not become self-fulfilling until investment and hiring pick up. These are naturally lagged responses, but critical nonetheless." National Bank said the export intentions index was low with a net 11% expecting improvement. A net 9% expected to raise prices over the year ahead, down 3 percentage points from May. "There is simply no pricing power left in the economy and we may well see inflation fall below the bottom of the 1 to 3%," National Bank said. A net 17% expected credit to be more difficult to get over the coming year, the survey found in a question asked for the first time. There were no comparatives, but similar US surveys showed credit being restrictive with a net minus 40-60% response to a similar question. "On the face of it the results may suggest that local grumblings in relation to credit are largely one of price as opposed to availability, and the issue of price is being dominated by aggressive competition for cash and rising deposit rates," National Bank said. It said the survey had not changed its core expectation that the RBNZ would keep the Official Cash Rate on hold 2.5% for an extended period. "The currency remains a key leg of frustration, and missing ingredient if the economy is to rebalance and recover." BNZ said in a research note the National Bank survey reinforced its doubts about the robustness of the recovery, referring to poor profit expectations.

The indicator that still bugs us is profitability. It's expected to keep falling, when we might have expected things to be closer to stabilising on this front by now. Yes, we know profits, like employment, lag the cycle. But these are profit expectations we're talking about "“ the same indicators that were swiftly positive at the beginnings of the recoveries from New Zealand's prior downturns. At the moment, they are country miles off that track. Incidentally, this trouble in profit land is underscored by corporate tax. It's running about 40% below year-ago levels. That's as big a collapse as we've seen in decades. It highlights where the worst of the pain is concentrated. It's been little surprise, then, to see today's survey telling of business plans to cut staff further, and to pare back on investment.