Friday, March 30, 2012

Well-founded optimism or wishful thinking?

The latest National Bank Business Outlook was a little ripper. New Zealand business confidence, particularly respondents read on the outlook for their own business, is consistent with GDP growth in excess of 4%. While that’s great to see and adds an element of upside risk to our expectations for GDP growth this year, there is room for businesses to be disappointed.

As you know, we believe New Zealand GDP growth will move higher over the course of this year, but will continue to be constrained by a number of factors. These include the high New Zealand dollar, lower commodity prices, tighter fiscal policy and continued caution by households towards spending. However, following the lower than expected December quarter GDP data, we went into 2012 from a lower base. That means despite the negatives, GDP growth could well be approaching 3% toward the end of this year, but over 4% will be too much of a stretch.

It’s good to see that businesses are internally consistent with their views. The higher general confidence has flowed through into increased employment and pricing intentions. While we think those pricing pressures will inevitably emerge, we still think the Reserve Bank has most of this year before they need to start responding to those sorts of pressures.

The increase in confidence was across all sectors of the economy. The construction sector is the happiest, which supports the view the housing market is coming off its lows and the sector’s recovery is not solely dependent on the Christchurch rebuild.

More generally we wonder if the improvement in confidence is more a sigh of relief following the global economic angst we had to endure last year. That means part of the recent increase in confidence could be put down to wishful thinking rather than well-founded optimism – they don’t call economics the dismal science for nothing. That means confidence could still come off a little bit and still be consistent with our more modest expectations for growth this year.