The National Bank states in their monthly Business Outlook for December 2007 the following, under the appropriate heading The joyous season?

The festive season has eluded business confidence. A net 25 percent of businesses expect business conditions to deteriorate over the coming year. This is down from 20 percent in November. Confidence ebbed lower in the retail, construction and service industries, while the pulse in agriculture and manufacturing improved a tad.

But the Grinch is far from stealing Christmas. Such pessimism has not pervaded across the entire survey. Firms’ own activity expectations have nudged higher, with a net 18 percent expecting better times for their own business over the coming year, up from 16 last month. Employment intentions followed suit. Conversely, investment intentions retreated to a six-month low – a potentially disconcerting signal about raising the supply-side capacity of the economy. Profit expectations dipped marginally. Our composite growth indicator from the survey continues to point to relatively robust growth of around two-and-a-quarter percent over the coming year.

Much of the economic news over the month appears more in line with the fall in headline confidence, as opposed to the relative stability shown across the majority of the survey. The New Zealand dollar continues to be propelled higher. While export intentions continue to retreat in the face of the high New Zealand dollar, a net 18 percent of exporters are expecting increased volumes over the coming year. This is perhaps remarkably robust considering the outsized surges in the NZD/USD, but more recently the rise in the NZD/AUD from a low of sub 0.83 cents in October to the 0.89 region of late. The housing market continues to weaken, retailing is soft, incomes and profits are being squeezed by rising costs, the New Zealand equity market has lost five percent in three months, and around the globe wide-spread concerns over a full-blown credit crunch have resurfaced.

Of course countering the trend was the widespread expectation around the country that Fonterra would end up raising the dairy payout (although the actual announcement was received after the survey was closed off), and choruses for tax relief given supersize-me Government Fiscal surpluses.

Again, we are left searching for the possible intangibles which explain shifts in business confidence relative to people’s expectations about their own business, or what the underlying messages are. We could put this down to politics or the switch between rugby and cricket seasons. However, there look to be broader forces at work.

Net-on-net, when you have inflation pressure (and pricing intentions nudged back up this month, led by the construction sector) the growth negatives need to outweigh the positives. The headwinds for the economy are getting stronger. Businesses appear aware of the growing challenges and the general economic environment. The combination of a repriced credit risk, wider spreads, easing wealth gains from assets, a higher currency and tight monetary policy, have delivered financial conditions that are the toughest for businesses since 1996/97, and just prior to the last ‘global event’.

Yet the economy still seems to have reasonable momentum. We suspect there is a strong base effect pervading, even as momentum eases. This merely slows the economy from a gallop to a canter. When you’re facing capacity constraints and inflationary pressure, stopping for a cup-of-tea (with respect to a former Prime Minister) is a welcome development. It’s very much a slow-burn turn in the economic cycle, consistent with the fabled soft landing that appears to be being engineered. Strong balance sheets have businesses in a robust position relative to previous cycles.

Moreover, the relative dichotomy across the survey is perhaps also reflective of the massive divergences we are seeing across the economy as a whole. Sheep meat is suffering but dairy doing well. Rural (dairy) aligned regions are set to outperform urban counterparts. Middle-to-low income families are being weighed by burgeoning living costs. While others are insulated. Such a dichotomised picture is also consistent with economies that go through inflection points in their cycles.

Cascading back to the last material disinflationary inspired change in the business cycle (1996/97), business confidence remained relatively robust initially, as the process of inflationary purging via tight financial conditions and slower growth progressed. Touchwood, a relatively benign and soft landing for the economy will be achieved. All the risk towards a counter outcome looks to be stemming from offshore.