New Zealand business confidence dropped in July, a movement ANZ New Zealand economists said was largely seasonal, as construction remained positive while residential investment intentions surged.

A net 16 per cent of firms surveyed in the ANZ Business Outlook expect better economic conditions in the coming year, down from a net 20 per cent in June, while a net 31 per cent thought their business would do better, compared to 35 per cent a month earlier.

Construction firms were the most upbeat with a net 52 per cent expecting residential building to increase, a 19-month high and a surge from net 29 per cent in June. A net 38 per cent of firms foresee more commercial building work in the year ahead, from net 28 per cent a month earlier.

The survey of 388 firms showed the agricultural sector was still pessimistic about the economy with a net 26.3 per cent expecting it to deteriorate, compared to a net 17 per cent in June. Agriculture was the only sector which was net negative about investment and employment intentions and profit expectations.


ANZ New Zealand chief economist Cameron Bagrie said 31 per cent of net optimism about firm's own prospects was still above average, and largely the same when accounting for seasonability.

The survey results were encouraging given financial headwinds such as a stronger NZD and weaker dairy prices when the survey was taken, but Bagrie warned that the economy was getting "too doped up" on borrowing.

"Valuation (housing) excesses are warning shots, re-leveraging behaviour (credit growth in excess of incomes) another," Bagrie said. "So too is a deterioration in household savings. The nation is borrowing and spending its way to growth as opposed to earning it."

New Zealand's economy has been supported by a housing boom driving construction activity, primarily in Auckland, where there's a shortage of supply, and as a record number of tourists visit the country.

At the same time, record net inflows of migrants have driven up demand for consumer goods and housing, while also filling a growing number of jobs and keeping wages static.

The nation is borrowing and spending its way to growth as opposed to earning it.


Bagri said any impact of the Reserve Bank's LVR lending restrictions for investors, announced this month, would be masked by a likely cash rate cut, and savers would suffer as interest rates would be "biased lower to drag down" the currency.

Pricing intentions dipped with a net 17.4 per cent looking to raise prices in the coming year, down from 20 per cent a month earlier. A net 12.3 per cent of manufacturers expect to increase prices, while a net 39.4 per cent of construction firms intend to do so. Inflation expectations were steady at 1.49 per cent.