Former Economics Editor of the NZ Herald

Businesses stay upbeat on prospects

Survey shows 31 per cent of firms optimistic - and acting on that with investment and hiring.

NZIER chief executive De Raad said there were no signs yet of pricing pressure spilling over from the Canterbury rebuild to the economy generally. Photo / APN
NZIER chief executive De Raad said there were no signs yet of pricing pressure spilling over from the Canterbury rebuild to the economy generally. Photo / APN

Business remains upbeat in the New Zealand Institute of Economic Research's quarterly business opinion poll.

A net 31 per cent of firms expect the general business situation to improve, unchanged from the March survey which was a three-year high.

The NZIER survey's measure of domestic trading activity, a better indicator of gross domestic product, eased, however, to a net 4 per cent positive, which was down from a net 10 per cent last time and a long-run average of 11 per cent.

But it is consistent with the economy expanding at an annual rate above 2 per cent, said the institute's chief executive, Jean-Pierre de Raad.

Crucially, businesses had been following through on their optimism with investment and hiring, which had been the missing ingredients in the recovery, he said.

For the third quarter in a row firms' intentions to invest in plant and machinery improved, to a level well above the long-run average.

The survey's labour market indicators also improved. "Hiring is surging in Canterbury and growing gradually elsewhere," de Raad said, and hiring intentions had strengthened.

"Labour, even unskilled labour, is difficult to find in Canterbury but relatively easy elsewhere," he said.

"Overall there are no signs yet that labour market conditions are translating into wage pressures."

One of the questions the survey asks is what single factor, if any, is most limiting businesses' ability to increase production or activity.

Most cite a lack of demand but that has been improving, to a post-recession low. The proportion citing capacity constraints has been inching higher, however, and is now above its long-run average.

"It is particularly high in Christchurch but it is also rising elsewhere."

A net 22 per cent of firms said they expected to increase their selling prices over the next three months, up from a net 13 per cent expecting in the March survey.

But the survey reveals something of an "If wishes were horses beggars would ride" effect. In the past three surveys the proportion of firms reporting they have raised their prices has fallen short of the proportion expecting to do so three months earlier. The current level of pricing intentions remains well below the long-run average for that indicator (a net 32 per cent).

De Raad said there were no signs yet of pricing pressure spilling over from the Canterbury rebuild to the economy generally.

"There is nothing in the survey we would expect to change the policy stance of the Reserve Bank."

The bank's June monetary policy statement did not pencil in any increase in the official cash rate until the middle of next year. That is also NZIER's view, though the money market is pricing in at least 50 if not 75 basis points of tightening by then.

ANZ economist Mark Smith said, "New macro-prudential tools aimed squarely at the Auckland housing market in the first instance will buy the Reserve Bank some time, but OCR increases in the first half of next year look ever more likely, unless the global situation deteriorates sharply."

Builders comprise the most optimistic sector, though some of their indicators have slipped from the stellar levels recorded in March.

Manufacturers are the next most upbeat, with hiring intentions steady at a positive and historically high level, while both experienced and expected output were up on March.

Manufacturers' expected profitability has slipped back from the strong level recorded in March, however, as rising costs are expected to outstrip higher selling prices.

Manufacturing's improved outlook is entirely driven by domestic demand, much of it likely to be linked to the Canterbury rebuild, de Raad said. Only a net 1 per cent of manufacturers reported higher exports, down from a net 11 per cent in March.

The weakness among Australian manufacturers does not augur well for NZ exporting manufacturers.

- NZ Herald

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