Business mood darkens, double dip suspected

New Zealand’s business sector has gone from sunlit uplands to the valley of despair in the past 12 months.

Business confidence has “plunged,” according to the New Zealand Institute of Economic Research’s quarterly survey of business opinion, released this morning.

Seasonally adjusted, a net 9% firms are pessimistic about the economy over the next three months.

In the June survey, a net 26% were in positive territory.

In the crucial “own activity” part of the survey, the difference is not as great but it still a move from net positive to net negative: from +15% to -2%.

It has been a long slow decline in overall optimism about the economic recovery. A year ago, the mood was so upbeat the institute’s principal economist, Shamubeel Eaqub, warned it was premature.

“The idea of a recovery is out there, and the reality is not quite as good as the expectations,” he said when the September quarter 2009 survey was released, in what turns out to have been a masterpiece of understatement.

The idea of the recovery is still out there. For most firms, though, it is still only an idea.

“This is being driven primarily by a lack of demand,” Mr Eaqub said today. “That points to a quite shallow, still stumbling recovery.”

Even more crucial is the activity businesses reported over the past three months.

This was also a net negative: -15%. Firms had expected a net negative, but nothing like as bad as that: -0.2%.

The drop is in line with the economy actually shrinking over the quarter – “down something like minus 0.2%,” Mr Eaqub said.

“The risk of a double dip recession has grown quite a bit.”

“We had expected things to go sideways, not go backward.”

The figure does not include the impact of the Canterbury earthquake, which happened just after the survey was mailed out.

Business profitability should normally, at this stage in the recovery, be picking up, he said, but instead it “has taken another big hit,” which means there is not the income to provide the “oomph for further investment and the next wave of the recovery.

“Expected and actual profitability are down. This is the biggest potential concern …Actual pricing is going sideways. Pricing intentions have been quite high in recent quarters but the ability to pass them on is not there and when the time comes they are just not able to do it.”

Hiring intentions remain strong but there is a question of how robust those expectations are.

They were also strong the same time a year ago – and in the following quarter unemployment surged.