Business confidence lowest since 1977

Press, 19 February 1986, Page 35

Business confidence lowest since 1977

PA Wellington Widespread business pessimism is reported today by the Institute of Economic Research in its latest quarterly survey of business opinion. It said the economy has gone into its sharpest contraction for some years and the drop is sharper in some respects than that of 1982, though similar to the 1977 recession. Business confidence has fallen to its lowest level since 1977 and opinion on trading conditions over the next six months suggests the trough in activity has not yet been reached.

The institute said activity has become the most subdued in the manufacturing and building sectors where new orders, output and domestic deliveries all show pronounced falls, and export sales show an even more dramatic fall. Glimmers of hope come from the services sector which shows a growth in output, and from domestic sales by merchants which are increasing though at an abated rate.

“This may imply that the sectors most open to the influence of the exchange rate and interest rates in their markets are those most affected,” the institute said. It added that much diminished profitability levels are now apparent and that all sectors, especially merchants, have become very despondent on short-term profitability prospects. The institute said the survey showed a sharp fall in capacity utilisation and a downward revision in capital investment plans was clearly evident. Corresponding with this increase in underused capacity, there were strong signs of a worsening in labour market con-

ditions for job seekers. The institute said that if the recession followed the pattern of 1977 and 1982, the results of the next survey in three months time would show a further decline before the low point was reached. In its detailed report on the survey, the institute said a net 61 per cent of businessmen expected a decline in activity through to the end of June 1986.

Not since September 1977 had more widespread pessimism been revealed. Manufacturers and builders had experienced a sharp decline in orders and output in the past quarter and were despondent about the March quarter. Insufficient demand remained the single most important factor impeding expanded activity. This factor was cited by 49 per cent of respondents in the services sector and by 79 per cent of manufacturers.

Shortage of labour and finance had each diminished in importance. The survey found that inflationary pressures remain strong but that, on balance, there is a slight reduction in cost pressures, most notably in manufacturing.

Reports of falling profits are widespread, with the decline being most marked in the building sector and least marked in the services sector.

All respondents expect a further deterioration in profitability levels and all sectors report more widespread pessimism in investment intentions over the next 12 months.

Building investment is expected to slow more markedly than investment in plant, machinery and equipment.

Among manufacturers, 66 per cent are pessimistic compared with a net 60 per cent in December 1982, the trough of the previous cycle. On balance, manufacturers report more widespread declines in all new orders received, output and domestic deliveries. Looking ahead they report for the March quarter the most pessimistic outlook for the last 10 years. Manufacturers have become significantly more gloomy over profitability expectations over the next quarter with a net 33 per cent forecasting a decline. Builders report a sharp decline in both output and new orders received over the December quarter, but domestic deliveries at a net 7 per cent continue to record a relatively small decline. Builders report widespread pessimism on these indicators for the March quarter. Architects, in their general assessment of work over the next 12 months, expect no change in both housing and Government or local authority work. A net 14 per cent, howevej, remain optimistic on commercial work and blocks of flats. The institute said this outcome contrasted with

the previous survey when most architects were optimistic on all their work. Merchants report less vigorous trading in the December quarter while looking ahead, they show for the March quarter the highest level of despondency on domestic activity since December 1982, with a similar situation prevailing in the export outlook. Merchants (at a net 29 per cent) have become the most dispirited for the three years concerning the volume of sales over the next six months, with 75 per cent of them citing low demand as their chief restraint. For the future, a net 55 per cent is pessimism through to the middle of 1986. In the services sector, a net 27 per cent reported growth in the past quarter but a net 3 per cent saw a substantial weakening of growth in the March quarter.

Low demand is quoted by 49 per cent as the main constraint but lack of finance (at 17 per cent) and of labour (at 13 per cent) remain relevant factors. At a net 60 per cent, pessimism in this sector has not been as rife for more than a decade, the institute said.