Business confidence falls on Christchurch quake, says NZIER

Photo / Herald on Sunday

New Zealand businesses are more pessimistic about the future after the 6.3 magnitude Christchurch earthquake sapped an already stalling economic recovery, according to the New Zealand Institute of Economic Research.

A net 11 per cent of firms were pessimistic about the general business situation in the three months ended March 31, according the NZIER's quarterly survey of business opinion. The gap between optimists and pessimists widened since the December survey, which showed a net 1 per cent of respondents were downbeat about the future.

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ASB economist Christina Leung said the results were broadly in line with the sharp decline in March business confidence in last week's NBNZ survey.

"Business confidence had shown tentative signs of improvement in the previous quarter, and the quarter one results indicate the earthquake threw a spanner into the already fragile nature of the NZ recovery," she said.

Still, principal economist Shamubeel Eaqub said the impact of the February 22 quake, which killed at least 166 people and caused as much as $15 billion of damage, was reasonably localised, and the rest of the country experienced flat rather than faltering conditions.

"Outside Canterbury, things are hanging up ok and are consistent with flat economic growth rather than contraction," Eaqub told a briefing in Wellington. "Profitability is being eroded by rising costs while prices are restrained by weak demand. This is limiting new investment and the recovery."

On top of souring sentiment, a net 5 per cent of companies experienced worse trading activity in the period, compared to a net 1 per cent in the December period, and a net 5 per cent are upbeat about future trading, compared to a net 12 per cent in the previous survey.

The response from Christchurch firms was smaller than usual, and the NZIER estimates local domestic trading activity was closer to a net 55 per cent of worse conditions than the reported 33 per cent.

ANZ economist Mark Smith said the data showed while a lot of activity has been displaced, it suggested that Canterbury suburban retailers were doing "quite nicely" from the closure of the CBD.

"Crucially, the Canterbury manufacturing sector is performing very well, with little sign of earthquake disruption," he said.

The release comes a week after the National Bank Business Outlook plummeted to a net 8.7 per cent of business owners pessimistic about the future, turning around a net 34.5 per cent being optimistic in February. The economy was already stalling and narrowly dodged a double-dip recession last year.

Surging commodity prices have offset New Zealand's stalling recovery, climbing almost 30 per cent over the past year to record highs in both New Zealand dollar and international currency terms on the ANZ Commodity Price Index. Reserve Bank Governor Alan Bollard expects consumer demand to pick up once farmers get their debt under control and can take advantage of the prices they're enjoying.

Eaqub said investment intentions were still a concern, with businesses holding back new purchases of plant and land, and that could limit future growth.

Building investment intentions were flat at a net -7 per cent of respondents compared to a net -8 per cent in December, while plant investment intentions remained flat.

That's weighing on profitability, and experienced profit worsened to a net -28 per cent from -21 per cent in December, while expected profits slumped to a net -22 per cent from -5 per cent.

Businesses' margins are being squeezed as they absorb more costs, and Eaqub expects inflation pressures will stay benign in the short-term before picking up in the future as the economy rebounds and wage pressures start coming to fruition.

Still, Eaqub was more upbeat about the labour market, with employers starting to find it more difficult to attract new staff. Hiring intentions were flat at a net 0 per cent looking to take on new staff, down from a net 4 per cent looking to hire in December.

Unemployment has stayed persistently high, unexpectedly rising to 6.8 per cent in the last three months of 2010, and that's kept a lid on consumer demand as households have used historically low interest rates to repay burgeoning debt bills rather than take advantage of the slew of sales retailers have been forced to hold.

- BusinessDesk and NZ Herald Online