Business Outlook for the month of November 2007 from the National Bank states the following;

Down but far from out. 

Business confidence has ebbed lower. A net 20 percent of businesses expect business conditions to deteriorate over the coming year, reversing a portion of the gain seen in October. Confidence eased in all sectors, with the exception of services.

The slippage in general business confidence is reflected across the entire survey. Firms’ own activity expectations have nudged lower, with a net 16 percent expecting better times for their own business over the coming year, down from a net 20 percent last month. Profit expectations and employment and investment intentions all eased. Residential construction stands out as the weakest sector in the survey, with a net 18 percent expecting a deterioration over the coming year. In contrast, commercial construction intentions remain robust, although easing from last month.

Looking ahead to summer, we have to look at a glass that is half full and there are three bright-spots in this month’s survey.

First, our composite growth indicator from the survey continues to point to relatively robust growth of just over two percent over the coming year. The fabled soft landing remains in reach. If this is truly the trough in the business cycle, it will be the most modest in recent history.

Second, the overall decline in confidence is relatively small – a development we take as being reasonably encouraging considering the barrage of global credit unease, fears of a recession in the United States, surging food prices placing a squeeze on disposable income, the high currency, calls for higher interest rates, and rising petrol prices. Of course, a lot of these developments really emerged in the second half of the month, so timing could be key. But stepping back, the equity market has taken on a rather sombre note, retail momentum is waning, and the housing market remains weak. Against the grain, prospects for tax cuts, still booming commodity prices and infrastructure spending remain powerful support factors to growth.

Finally, inflationary pressures have eased a tad with inflation expectations nudging lower and pricing intentions receding to an 11-month low. A net 27 percent of businesses expect to raise prices over the coming year, compared to a net 31 percent last month. Of course one swallow does not make a summer. Both inflation expectations and pricing intentions remain high. Currency sensitive areas including agriculture and manufacturing showed the largest falls in pricing intentions, while pricing intentions in the service sector increased to a 7-month high. Yet net-on-net, pricing behaviour has once again turned in the right direction, a development that will likely be welcomed by the Reserve Bank.

Looking at the broad picture, the economy looks to be in a sweet spot. A reasonable base to growth has formed. However, growth – courtesy of a slowing housing market – is easing, albeit from a gallop to a canter, a necessary requirement to dampen inflation pressure. Yet if the inflationary beast can be tamed with a trough in the economic cycle of 2 percent, it will surely be viewed as an economic success.