Lift in business confidence sets scene for inflation rise

The construction sector's strength is also driving demand for staff, and hiring intentions across all sectors. Photo / Getty Images

Reserve Bank governor still tipped to cut the official cash rate next month.

Inflation may be on the rise at last, some economists say, after a survey of business opinion has shown renewed confidence.

A tightening labour market and a slight lift in pricing intentions are among the early signs that inflation may finally be starting to edge up, ASB senior economist Jane Turner concluded after yesterday's Quarterly Survey of Business Opinion.

New Zealand firms turned optimistic about the state of the economy in the June quarter as moderating cost pressures allow for wider margins, and a lifting in companies' profit expectations.

A seasonally adjusted net 18 per cent of firms surveyed in the NZ Institute of Economic Research's quarterly survey of business opinion expect general business to improve, turning from a net 2 per cent of pessimistic responses three months earlier.

A net 22 per cent 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.

The Reserve Bank would be encouraged with the results, suggesting domestic momentum had improved since March, Turner said.

"The reported tightening in the labour market will increase the RBNZ's confidence in its inflation forecasts and is likely to further raise the threshold for OCR cuts below 2 per cent," she said.

However, Westpac economists were less optimistic.

"Even with continued solid growth and a tightening labour market, there is little to suggest that inflation is on the verge of breaking higher again," acting chief economist Michael Gordon wrote.

ASB is still picking a cut to the OCR in August and says another later in the year is still likely - although the odds on that have reduced.

The QSBO follows ANZ's business confidence survey last week, which showed optimism was at a six-month high in June as the booming tourism and construction sectors continued to support economic activity.

NZIER senior economist Christina Leung said the building pipeline was a key driver in the economy. She expected annual gross domestic product would 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.

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

"One thing to be watching out for is that skill shortages are becoming more acute, particularly in the building sector," Leung said. "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 that created a buffer for businesses "when it comes to how much to lift wages" which would 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.

The survey was held before the UK referendum on leaving the European Union and Australia's federal election, which had created more uncertainty for 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. Additional reporting BusinessDesk