Pre-election predictions of a slumping economy could be borne out if the latest survey of business confidence is a portent of the future. The ANZ National Bank business outlook for November shows the mood of business at its lowest level since the 1987 sharemarket crash but there is no impending crisis.
A net 66 per cent of firms expected general business conditions to deteriorate over the next year – the lowest level of business confidence since the sharemarket crash in the late 1980s. Pessimists accounted for 71 per cent of replies and optimists five per cent.
Firms’ own activity expectations – a key barometer of economic growth prospects – were also crushed. A net zero per cent of respondents expect conditions to improve over the coming year, the lowest level since the grumpy growth period of 2000.
“This level of confidence is indicative of an economy at a stand still and forewarns there could be a negative GDP outturn in the last quarter of 2005 or the first quarter of 2006,” chief economist John McDermot said.
Consistent with the decline in firms’ expectation about their own activity was a fall in profit expectations, employment intentions and investment intentions. No meltdown coming“The potential slowdown has been on the horizon for a while now and has been commented on so often that people are starting to believe the economy is in a meltdown.
It is not. The truth of the matter is that economy grew strongly in the first nine months of 2005, but this expansion looks to be built on unstable foundations. “Unfortunately, it feels like we are walking uphill in a mist of uncertainty and somewhere in that mist is the cliff we could fall down – unless we tread carefully,” Dr McDermott said.
Finance Minister Michael Cullen said the fall in business confidence was no surprise given the sensitivity to official interest rates, which are at their highest level since the official cash rate was introduced in 1999. Briefing papers from the Reserve Bank, issued yesterday, said the economy had serious imbalances. Factors included high domestic demand, core inflation knocking 3 per cent, a widening balance of payments deficit, a high dollar and high house prices.
"All these factors point to a rough landing unless debt-financed consumption begins to slow," Dr Cullen said. Official interest rates are expected to rise to 7.25 per cent next month, despite the gloomy business outlook, falling consumer confidence and official figures showing low migration. Though some commentators had called for a halt to rising interest rates for the sake of the economy, "such pleas will fall on deaf ears", he said.
The Reserve Bank was aware that if higher unit labour costs and higher oil prices were producing inflation, the only way to counter that was by slowing or stopping economic growth. The bank survey showed inflation expectations had again increased, to 3.4 per cent in November, the highest level since the middle of 2000.
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