Net 47% of businesses in National Bank's June survey expect general business conditions to improve, up 7% from May. NZ$ jumps to 82.9 USc

National Bank's Business Outlook survey for June showed a net 47% of those surveyed saw a general business improvement in the next year, up 7% from May.

The New Zealand dollar surged to near a record high immediately after the release of the data in early afternoon trade. It hit 82.9 USc around 1pm on Thursday, just below its post-float record high of 83.0 USc hit on June 9.

The Business Outlook survey is closely watched as a leading indicator of economic activity.

A much stronger than expected figure can boost exchange rates and interest rates because it increases expectations the Reserve Bank may have to hike the Official Cash Rate to slow the economy and any inflationary pressures.

However, a net 39% expected their own businesses to improve, down 1% from the previous month.

Confidence improved most in rural areas, but employment intentions and intentions to increase prices were weak. This may soften expectations about interest rate increases.

The Reserve Bank is currently not expected to start lifting the OCR from its current 2.5% post-quake emergency setting until December at the earliest.

Business confidence in Canterbury was strong, but profit and employment intentions there were weaker, highlighting the fragility of expectations in the quake-hit city.

Here is National Bank's commentary on the data:

Business confidence continues to hold out the alluring prospect of better times for the economy. A net 47 percent of respondents expect general business conditions to improve in 12 month’s time, up 9 points on the month prior.

While business confidence lifted another notch in June, other indicators from the survey generally failed to follow the improving trend, stabilising around May’s readings.

A quick look through the results reveals:

• A net 39 percent expect better times for their own business over the year ahead, down a point on the month prior.

• Profit expectations eased. A net 20 percent of firms expect profits to be higher going forward. This is respectable (the mean is 7), but down 3 points.

• Employment intentions fell 3 points. A net 10 percent of businesses expect to lift staff levels over the year ahead.

• Overall, investment intentions were unchanged at +15. However, residential investment intentions lifted from +33 to +49 and commercial construction from +21 to +31.

• Export intentions lifted 3 points. A net 31 percent of firms expect to be exporting more over the year ahead. This is particularly encouraging given the giddy peaks reached for the NZDUSD when most survey responses were rolling in.

At the regional level we can see some clear emerging trends.

The strongest lifts in firms’ own activity expectations came from Northland (+13), Waikato (+24), Hawke’s Bay (+ 20), Taranaki (+20), Otago (+14) and Southland (+17).

These are the late bloomers of the recovery. The picture across other sub-components (i.e. employment, profitability and investment) was not so clear cut but still suggested a firming tone, particularly in rural regions such as Hawke’s Bay and the Waikato.

While Canterbury remains the most optimistic region according to general business confidence (+60), such exuberance is not flowing through into other measures.

Canterbury’s regional ranking on firms’ own activity expectations fell from 3rd to 13th (+48 to +23). Profits went from 2nd to 6th. Employment from 1st to 10th. Investment intentions bucked the trend remaining at 2nd.

Such movements highlight the obvious seismic challenges and also why it was so important the Government took such proactive steps in using its own balance sheet last week, giving households — and implicitly, businesses — certainty (or hope) over where things are headed.

Inflationary gauges from the survey eased. A net 27 percent of firms expect to be raising prices over the year ahead, down from a net 34 percent last month.

One-year-ahead inflation expectations eased from 3.3 to 3.2 percent. We take mild comfort from both. Second-round pricing risks associated with a high headline rate of inflation are not manifesting, for now.

More soon