Business optimism flat - NZIER

The Canterbury rebuild is helping to boost business confidence. Photo / APN
The Canterbury rebuild is helping to boost business confidence. Photo / APN

The Reserve Bank is likely to keep interest rates on hold until at least the middle of next year as a patchy economic recovery keeps a lid on wage and capacity inflation pressures, according to the New Zealand Institute of Economic Research.

Principal economist Shamubeel Eaqub told a briefing in Wellington the Canterbury rebuild is soaking up spare capacity in that region, but that there is huge excess through the rest of the country, damping inflationary pressures.

Combined with tepid wage growth through most of New Zealand, that will let the Reserve Bank keep the official cash rate on hold for longer.

"Short-term and medium term inflation pressures are subdued,'' Eaqub said. "The Reserve Bank will be firmly on hold for some time, at least until the middle of next year and maybe even longer'' if the global situation doesn't improve, he said.

Central bank Governor Alan Bollard kept the official cash rate on hold at 2.5 percent at last month's meeting and pushed out future hikes, blaming the strength of the New Zealand dollar for keeping a lid on imported inflation.

In its latest Quarterly Survey of Business Opinion, NZIER found a net 57 percent of financial services sector respondents expect interest rates to rise in the coming year, compared to 26 percent previously.

A net 24 percent of surveyed businesses are optimistic about the coming quarter in the NZIER's latest quarterly survey of business opinion, up from a net 1 percent in the previous survey. Still, their experienced trading activity was lacklustre in the period, improving to zero percent in the March quarter, from a negative 4 percent reading the period before.

"The survey shows most indicators are going sideways, suggesting a gradual and patchy economic recovery,'' Eaqub said. "The pace of recovery is modest and has not accelerated in the past nine months.''

Government figures showed just 0.3 percent growth in the final three months of 2011, half of what was expected by economists, after a weak manufacturing sector dragged down the headline reading. That's prompted economists to rein in their expectations for economic growth, with the NZIER's consensus forecast picking a shallower recovery than previously picked in its March survey.

Today's QSBO reading is consistent with annual growth of about 2 percent, NZIER said.

More firms expect worse commercial performance in the period ahead, although profitability expectations improved marginally to a negative 15 percent from negative 17 percent in the December period, while expectations improved to 4 percent for the next quarter from zero.

Investment intentions in plant and machinery declined to negative 2 percent from zero previously, though building investment improved to negative 4 percent from negative 6 percent.

"Investment intentions are very high in Canterbury, but weak elsewhere,'' the report said.

Eaqub said the build-up of inventories and tepid domestic demand is building a "noxious mix of weakness'' for the manufacturing sector.

Manufacturing business confidence improved to 11 percent from negative 13 percent in December, and experienced output gained to 3 percent from zero percent.

Building industry new orders improved to negative 7 percent from negative 21 percent, though output deteriorated to negative 11 percent to negative 7 percent.

"Conditions are improving, mainly for building construction, while building materials weakened a touch,'' the report said.

Employment was flat at 1 percent, while hiring intentions declined to 5 percent from 7 percent, though finding skilled labour remained difficult, at negative 21 percent from negative 19 percent.

- BusinessDesk

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