Profit expectations up amid rise in optimism

Fewer companies faced higher costs in the June quarter.

New Zealand firms turned optimistic about the state of the economy in the June quarter as moderating cost pressures helped boost margins and lifted profit expectations.

A seasonally adjusted net 18 per cent of firms surveyed in the New Zealand Institute of Economic Research's (NZIER) quarterly survey of business opinion (QBSO) expect general business to improve, turning from a net 2 per cent of pessimistic responses three months earlier. A net 22 per cent of those companies experienced stronger trading activity in the past quarter, and a net 19 per cent see more expansion in the coming three months, up from 18 per cent and 6 per cent respectively in March.

Stronger profit expectations helped underpin the pick-up in confidence, with a net 2 per cent experiencing bigger profits in the past quarter and a net 16 per cent expecting more gains in the coming period. Fewer companies faced higher costs in the June quarter, and 19 per cent anticipate an increase in expenses, compared to 24 per cent in March, while a net 1 per cent raised their prices in the June quarter, and a net 11 per cent expect to hike prices in the coming period.

"Moderating cost pressures and improved pricing power have seen an improvement in profitability amongst businesses," NZIER senior economist Christina Leung said. "Demand held up over the quarter, against expectations earlier this year of a softening in demand." The QSBO follows ANZ Bank New Zealand's business confidence survey last week, which showed optimism was at a six-month high in June as the country's booming tourism and construction sectors continued to support economic activity.

Leung said the building pipeline was a key driver in the economy and expects gross domestic product will peak at 3 per cent in the June quarter, before moderating to 2.8 per cent by the end of the year.

The construction sector's strength is also driving demand for staff, and hiring intentions across all sectors showed a net 13 per cent intend to take on new employees in the coming quarter, though a net 39 per cent are finding it hard to find skilled staff and a net 13 per cent are struggling to find unskilled workers.

"One thing to be watching out for is that skill shortages are becoming more acute, particularly in the building sector," Leung told a briefing in Wellington. "That is definitely something that could be limiting the degree to which building activity can ramp up over the coming years."

Still, wages remained fairly well contained with a lot of people looking for work, and Leung said that created a buffer for businesses "when it comes to how much to lift wages" which will mitigate their cost pressures.

Investment intentions improved, with a net 11 per cent looking to buy new buildings, up from 2 per cent in March, and a net 18 per cent expecting to invest in plant and machinery, up from 11 per cent.

Leung said the NZIER expects inflation will increase "gradually over the coming years" and anticipates the Reserve Bank will cut the official cash rate at next month's meeting.

The survey was held before the UK referendum on leaving the European Union and Australia's federal election, which has created more uncertainty to the global economy and "suggests a greater risk the Reserve Bank will choose to cut the OCR in August in a bid to buffer the New Zealand economy against any downside risks," Leung said.

The QSBO does not cover agriculture. The regional breakdown showed South Island firms turned optimistic about the economy in the June quarter at a net 12 per cent seeing good times ahead, compared to a net 12 per cent of pessimists in the March quarter.

- BusinessDesk