Business Improvement Good for Property Too

A net 48% of businesses expect better times for the economy over the coming year, up marginally on June.

Sentiment is strong across all the sub sectors, with business confidence levels residing well north of their historical averages. The elevated readings in general business confidence continues to be reflected in respondents’ own activity outlook.

A net 44% of businesses anticipate an increase in activity, up 5 points on June. This continues to be reflected in expected gains in profits (+24, up 4 points), investment (+18, up 3) and employment (+19, up 9).

The July results are tremendously encouraging.

They have been taken amongst a backdrop of global uncertainty, softening commodity prices (from highs), firming expectations that interest rates will be moving up (a net 59 percent of respondents expect higher rates) and a rising currency, though the majority of the New Zealand dollar’s movement over the month occurred after most responses were received.
Our composite growth indicator from the survey is now pointing to 5% growth over the year ahead.

With growth in the first quarter of the year coming in at 0.8% (annualised 3.2 percent) and revisions to prior quarters, the noted mismatch between business sentiment (which has been portending of better times for a year) has been settled. Reality is catching up with the expectations.

With every step along the recovery path different challenges emerge.

New Zealand’s story looks good. Yet on a relative basis to global peers it looks remarkable, and the danger in such instances is that financial markets front-run the story so far via a higher currency and expectations of higher interest rates that one nucleus of support, namely loose financial conditions disappears before the party has moved beyond 9pm.

A net 29% of businesses expect to raise prices.

The latter is not overtly high nor a catalyst to rising rates in itself, though with a net 50% of businesses in the construction sector expecting to lift prices, the RBNZ’s June assumption of subdued construction cost inflation looks wishful thinking.

The construction sector is now leading the charge across confidence, activity, employment, investment and pricing intentions. An emergency policy setting for the OCR is no longer required. An OCR at 2.5 percent is on borrowed time.

The unwind of policy support will present challenges. We are only six months into an expansion phase (well technically nine months by the time the official data catches up!). The New Zealand dollar has been turbo-charged higher of late. The global economy remains frail. A banking sector crisis has been replaced with the potential for a sovereign equivalent.

The global economy desperately needs leadership, yet the fiscal austerity required screams of populist promises of alternative solutions. Beware such promises and magic potions - for typically they are snake-oil. There is much for the RBNZ to monitor and weigh up. The risk is that a relatively uncomplicated decision becomes complicated. Sometimes when you have a job to do, you’re better to just get it done. Brace for interest rates to move up. Call it taking the Official Cash Rate from being extraordinarily low to just exceptionally low.

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