National Bank Business Outlook survey for April shows rebound in business confidence from post-quake slump in March

The National Bank Business Outlook survey for April showed a significant rebound in confidence in April from March, indicating an annual GDP growth rate of 3% by the end of the year.

The New Zealand dollar immediately spiked up to 81 US cents after the release of the figures showing surprising resilience in the economy. It retreated to 80.7 US cents by 2pm on signs that inflation expectations were contained.

Economists are forecasting the Reserve Bank is likely to leave the Official Cash Rate (OCR) on hold until December at the earliest, and possibly not increasing it until the first quarter of 2011. JP Morgan saw the hike delayed unto the second quarter of next year. See Alex Tarrant's article previewing this Thursday's OCR decision here.

ANZ National's economists said around two thirds of the fall in confidence seen in March after the February 22 earthquake had been recovered in April.

"An outsized decline in business confidence in March has been followed by a material rebound," they said.

A net 14% of businesses are expecting better times for the economy over the coming year, up 23 points on March. Firms’ own activity expectations lifted 15 points, to a net 30% expecting improvement over the year ahead.

"A recovery in general business confidence is one thing. But the litmus test for the economic outlook is surely what firms anticipate for their own business. In this regard, to recover two-thirds of the fall in activity seen in the previous month is encouraging," they said.

The employment and profit outlooks turned positive in April. Residential investment intentions surged, with a net 48 percent of businesses are expecting better times ahead.

Canterbury led the rebound in confidence with headline confidence in Canterbury up 59 points, after falling 92 points in March.

"Firms’ own activity expectations in the region lifted 35 points, bettered only by the Waikato — which could be detecting the aura of an open rural cheque-book. Profit expectations were up 45 points (down 58 in March)," they said.

Canterbury employment intentions lifted 36 points, fully reversing the March decline.

Residential investment intentions were the strongest in Canterbury, with a net 80% expecting better times ahead and 86% expecting better times for commercial construction.

"The April edition of business confidence suggests the material fall in March was more “shock and awe” than substance," the economists said.

This is not to downplay the significance of the February earthquake. It is an event of epic proportions. There are still hurdles for the economy. But glimpses of recovery in early 2011 look to be getting back on track. And we suspect sooner rather than later."

Inflation expectations not rising

Pricing intentions within the survey eased a point with 28% of firms expecting to raise prices over the year ahead, while one-year ahead inflation expectations were broadly unchanged at 3%.

"Both are encouraging considering the headline inflation rate is at 4.5 percent. However, subsequent months will put businesses to the true inflation test, especially in terms of how businesses react to the combination of cost-push pressure versus the demand environment."

Here's JP Morgan economist Helen Kevan's view

Meanwhile, the pricing indicators were subdued. Pricing intentions fell marginally in April, with a net 28% of firms expecting to raise prices, but inflation expectations remaining steady at 3.0%. More firms (a net 30%) expected higher interest rates over the coming year.

The more important measure of firms’ own activity expectations, a key gauge of what businesses think about their own prospects, lifted nearly 15-points to a net 29.5 in April. This result signals, as per the chart below, that the economic recovery should gather momentum, following what we believe will be a negative GDP print in 1Q.

Our view is that the RBNZ will be on the policy sidelines at least for the remainder of 2011, leaving current, stimulatory settings in place in order to revive the economy, but that a rate hike will be delivered in 2Q12. Indeed, there is little urgency to tighten policy, particularly given the inflation environment is subdued and will only be tempered further by recent NZD appreciation.

(Updated with more detail, charts, reaction and link to 'Where Interest rates are headed article')