Brian Fallow: Why the long faces about the economy?

Growth has slowed, but economic activity is still above the long-term average. Picture, Nick Reed

Spot the odd one out among these indicators:

• Economic growth is running at 3 per cent, down from its recent peak but still above the long-run average of 2.5 per cent. The consensus among forecasters is for it stay around this level for the next couple of years.

• Inflation, at 1.9 per cent, is just about smack in the middle of the Reserve Bank's target band and it has signalled no plan to raise interest rates from what are historic lows for another couple of years (though private sector forecasters are more hawkish).

• The terms of trade are the most favourable ever and global growth is looking better than it has for years.

• Domestically, the labour market is strong. The unemployment rate is at a nine-year low even with labour force participation at a record high. Wage inflation remains subdued but jobs growth has been strong enough to lift consumers' collective labour market incomes by more than 5 per cent over the past year.

• Business confidence has fallen sharply for the second quarter in a row in the New Zealand Institute of Economic Research's quarterly survey of business opinion (QSBO), published this week. A net 12 per cent of chief executives expect general business conditions to get worse over the next six months, down from a net 5 per cent optimistic three months ago and a net 18 per cent optimistic three months before that.

In the context of such cheerful economic indicators it is tempting — but too swift — to dismiss this surge of pessimism as post-electoral sulking.

Certainly there is a pattern here. NZIER principal economist Christina Leung said previous surveys had found business confidence fell when Labour took office and climbed when National did. But the effect of a change of Government on the survey's activity indicators was muted, she said.

In the latest survey, a net 10 per cent of firms reported a rise in their own activity over the past three months, down slightly from a net 13 per cent in the September survey. A net 18 per cent expect activity to rise in the next three months, down from a net 26 per cent last time.

Hiring intentions have eased, but only back to where they were last June, and remain well above their long-term trend.

Firms report increasing difficulty in finding the labour they need, both skilled and unskilled.

The flipside of that is evident in the Westpac McDermott Miller employment confidence survey, also released on Tuesday. It is a survey of households rather than businesses.

The terms of trade are the most favourable ever and global growth is looking better than it has for years

Workers are reporting job availability is the best it has been since 2008, said Westpac senior economist Satish Ranchhod, and most expect opportunities will continue to improve over the coming year.

But they are still pessimistic about their chances of a pay rise this year, with only a net 24 per cent expecting one, the second lowest reading for that indicator in the 12 years the survey has run.

The exception is those households earning less than $30,000 a year, who are the most optimistic they have been in seven years about the chances of a pay rise, Ranchhod said.

Historically, there has been a pretty close correlation between skilled labour shortage as reported in the NZIER surveys and private sector wage growth a year later. That relationship has broken down over the past three years or so, but may be about to recover under the twin influences of an improving labour market in Australia and some tightening of immigration policy here.

The boost to labour supply from net immigration is expected to fall, while the change of Government should presage higher settlements in public sector pay rounds as well as a string of rises in the minimum wage.

There is also the prospect of "fair pay agreements". While detail is still awaited, Labour has described the object of the exercise as setting a floor to prevent the race to the bottom, where good employers are undercut by some bad employers who reduce labour costs through low wages and poor conditions.

If firms are grumpy about the prospect of higher payroll costs, it may be because the QSBO continues to provide evidence of a squeeze on profit margins. In the latest survey, a net 29 per cent reported higher costs, outstripping the net 18 per cent who said they had raised their selling prices.

A net 7 per cent reported a decline in profitability and (in contrast to previous surveys) a similar proportion expect a further deterioration in profitability in the next quarter.

And the hard data support this. The most recent tax revenue data we have, for the four months ended October 2017, showed the company tax take down nearly 7 per cent on the same period a year earlier.

We are left with a picture of business sentiment delicately poised.

On the one hand, it would be understandable for business to tai hoa until it gets the measure of the new Government, especially when profit margins are under pressure.

On the other hand, the economy starts the new year with considerable momentum. Two of the factors which have underpinned the strong growth of recent years — the wealth effect from rampant house price inflation and exceptionally strong population growth — may have peaked. They needed to, but they have hardly fallen off a cliff.

If wage costs are set to rise, it has been a long time coming and it is a truism that one firm's employees are other firms' customers.

And borrowing costs are low.

The latest QSBO found a net 10 per cent of firms expect to increase investment in plant and machinery over the next 12 months. That is down from a net 17 per cent in the previous survey but remains above the long-term trend for that important indicator and above the levels seen during the mid-2000s boom.

Let's hope it holds up because a repeat of the winter of discontent that greeted the Clark Labour Government is the last thing we need.