Businesses return to upbeat outlook on recovering dairy

A net 11% of businesses were confident about the general outlook for the economy over the coming year.

New Zealand firms returned to an upbeat outlook in October, as signs of recovery in dairy prices saw firms more confident about their own profitability and plans to hire and invest more in their businesses.

A net 11 percent of businesses were confident about the general outlook for the economy over the coming year, an improvement from last month when a net 19 percent of firms were pessimistic, according to the ANZ Business Outlook survey. A net 24 percent of firms see their own activity expanding in the coming year, up from a net 17 percent in September.

Earlier in the year a sustained drop in dairy prices, forecasts for dry weather, and an absence of inflation saw the Reserve Bank lower the official cash rate three times, to 2.75 percent from 3.5 percent, and has prompted economists to downgrade their outlook for economic growth. While the price of dairy, New Zealand's largest export commodity, remains volatile, it has begun to show signs of recovery and risen from its lows.

"It's hard to go past rebounding dairy prices as the catalyst but we believe there's a broader story," said Cameron Bagrie, chief economist at ANZ Bank. "New Zealand is more than cows alone. Sentiment across the service sector is tops for confidence, activity, profits, employment and investment. As New Zealand's largest sector, that's meaningful."

The New Zealand dollar jumped higher following the publication of the survey. It recently traded at 67.26 US cents, up from 67 cents immediately before the 1pm release.

Of the 451 respondents across the sectors, a net 12 percent expected to hire more workers, while a net 13 percent were expecting an uptick in profitability, with a net 23 percent expecting to increase prices. A net 12 percent expected to make further investments in their businesses.

Splitting the respondents out into their sectors, retail, manufacturing, construction and the services industry were all confident about general economic conditions, while a net 21 percent of agriculture firms were pessimistic. The same trend shows through all of the measures, with agriculture firms taking a negative outlook for their own business in the coming year, as well as their expectation of profits, and were unlikely to make any investment, while the other sectors were upbeat.

ANZ's composite growth indicator, which combines business and consumer sentiment, increased and is flagging economic growth of 2.5 percent.