Brian Fallow

The Economics Editor of the NZ Herald

Inflation spectre in strong recovery

NZIER quarterly survey of business paints picture of robust economic conditions and rising interest rates.

Shamubeel Eaqub.
Shamubeel Eaqub.

A recovery growing stronger and broader, but accompanied by inflation pressures, is the picture painted by the New Zealand Institute of Economic Research's latest quarterly survey of business opinion (QSBO).

The QSBO is the longest-running and most comprehensive survey of business sentiment. The March survey found a net 52 per cent of firms expect the general business situation to improve over the coming year, unchanged from December which was a 20-year high.

Companies' own trading activity, which more closely mirrors economic growth, picked up to its highest level since December 2003 when gross domestic product growth was around 4.5 per cent.

But NZIER principal economist Shamubeel Eaqub does not expect growth to reach that rate this time, pointing to credit expanding at only half the pace it was then.

The net 25 per cent positive reading for trading activity nationwide reflects the levels in Auckland and Canterbury, but is exceeded in Nelson/Marlborough and Southland at 44 per cent and 33 per cent respectively, while Otago, Hawke's Bay, Northland and Bay of Plenty are languishing by this measure.

Investment intentions are strong. A net 20 per cent of firms expect to increase investment in plant and machinery over the year ahead - the most since 1994 - while building investment intentions are the highest since 1975.

"Hiring intentions eased a touch but remain consistent with robust employment growth," Eaqub said.

A net 16 per cent of firms raised their prices over the past three months and a net 37 per cent expect to do so over the next three months, up from a net 23 per cent.

Westpac economist Michael Gordon said the lift in the pricing measures was the most substantial change since the previous QSBO and provided further backing for the Reserve Bank's decision to start lifting interest rates now in order to head off inflation pressures over the next couple of years.

"Even so, we are wary of overstating their significance; reported price increases, while rising, are still well below boom-time levels," he said.

Deutsche Bank chief economist Darren Gibbs noted that among retailers the pricing gauges were more subdued, with a net 6 per cent of firms raising prices in the March quarter and a net 16 per cent expecting to in the June quarter - around average levels for these indicators.

"Whilst we doubt that the Reserve Bank will be surprised at the activity indicators in this survey, we think that the pick-up in pricing pressures outside of the retail sector will be noted with some concern.

"We expect the bank will view the survey as a green light for a further 25 basis point rate hike on April 24," Gibbs said.

Eaqub said that with pricing pressure widening beyond Canterbury and the construction sector, interest rates would continue to rise, with floating mortgage rates getting to 7.5 per cent over the next year.

The number of firms saying a lack of sales is the main factor preventing them from increasing production continues to decline while labour and capacity constraints are increasingly cited.

But while skilled workers are becoming harder to find, it is no more so than in recent quarters, and reported capacity utilisation actually fell to below-average levels, led by manufacturers and exporters.

"There's no sense that this spare capacity is the result of a drop-off in production by manufacturers," Gordon said.

"In fact quite the opposite. So it may be that firms have made some much-needed investment in new capacity - only three quarters ago, manufacturers' capacity utilisation was approaching record highs. That bodes well for the economy's ability to grow at the sort of rates that the headline confidence measures imply."

Recovery

• A net 52% of firms expect the general business situation to improve over the coming year.

• A net 20% of firms expect to increase investment in plant and machinery over the year ahead.

• A net 37% expect to raise their prices over the next three months.

- NZ Herald

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