Business leaders wary as confidence falls

Caution is the prevailing sentiment among business leaders as they contemplate the economy's prospects over the year ahead.

More than half of the Mood of the Boardroom survey's respondents selected "cautious" from the four options they were given. Among the rest, twice as many declared themselves "confident" as "not at all confident". None were "very confident".

This is in line with declining business confidence seen in the National Bank and New Zealand Institute of Economic Research surveys and other indicators of an economic slowdown.

Topping the list of the general economic factors of most concern is the shortage of skilled workers.

Concern about skill shortages has loomed large in business sentiment surveys for years. It is the tightest labour market in a generation, with unemployment at a world-beating 3.7 per cent.

There are early signs of some easing of that pressure: the Department of Labour's monthly monitor of job advertising recorded 10 per cent fewer vacancies for skilled tradespeople in July than a year earlier.

And NZIER's June survey recorded a sharp fall in firms reporting increased difficulty in finding skilled labour.

The big picture, however, remains one of chronic shortages of skilled labour, a demographic trend of declining labour force growth over the medium and long term and continuing competition from Australia, which has its own skill shortages and can pay a lot better.

All the political parties claim to have policies to lift the number of apprentices and boost formal industry training.

The second biggest concern is the security and cost of energy. World oil prices are soaring, while electricity prices increase relentlessly.

The cancellation of Meridian Energy's Project Aqua, the Nimby issues bedevilling Transpower's plans to upgrade transmission to Auckland and the need for a Government guarantee to make Genesis's new gas-fired plant bankable have created a perception of a hand-to-mouth outlook for electricity supply, compared with the comfortable era when power supplies were underpinned by cheap and abundant Maui gas.

National's policy is to 'fix" the Resource Management Act and "facilitate" oil and gas discoveries, while Labour puts its faith in the Electricity Commission and a focus on renewable energy.

The Kyoto Protocol remains a bugbear, ranking third among economic concerns. The climate change treaty represents the beginning of a fundamental shift to rationing through price the right to emit greenhouse gases.

An embarrassingly large revision by officials of the national impact, from being $500 million to the good over the 2008 to 2012 period to being $500 million in the red, has not endeared Kyoto to the business community or the public.

Labour's Pete Hodgson remains committed to the treaty and to the carbon tax, the main domestic policy instrument intended to restrain growth in emissions.

National says it would scrap the carbon tax and consider pulling out of the treaty.

Next come the twin concerns of a sky-high dollar and our gaping chasm of a current account deficit.

Six months ago the kiwi dollar hit post-float highs against the US dollar. Relief among exporters when it headed south for a couple of months from early May has turned sour as it has climbed back up above 70c.

It has meant that despite record world prices for out main export commodities the trade gap has widened to a gaping $5.4 billion as exporters struggle and consumers splurge on cheap imported goods. Associated with that, the current account deficit ranks fifth among businesses' economic concerns - recognition of the risks in having to rely on other people's savings to fund the shortfall, currently to the tune of more than $10 billion a year.

Among the political parties only New Zealand First and the Greens say more should be done to manage exchange rate volatility.

The Labour Government has given the Reserve Bank a mandate to intervene in the foreign exchange market to shave the tops and bottoms of the exchange rate cycle if it thinks it would do any good. So far it has not, and National would rescind that mandate.

A little surprisingly, in light of the sustained lobbying by business groups and an international trend towards lower rates, the corporate rate tax weighs in at number six out of nine.

Labour has no plans to cut the company rate from 33 per cent and National has said its planned cut, to 30 per cent, may have to wait until 2008.

Interest rates rank seventh among the business leaders' worries.

After seven interest rate hikes since the start of last year, economists and the money markets believe Reserve Bank Governor Alan Bollard has tightened the screws as much as he is going to this cycle and that the next move in rates will be down.

But combined with the high dollar, the current level of interest rates mean monetary conditions are quite restrictive, a reflection of the fact that inflation (worry number eight) is heading above 3 per cent and perhaps as high as 4 per cent.

Tight monetary policy has so far had only a limited impact on the housing market, which has had its strongest run since the 1990s.

The domestic economy has benefited from homeowners' willingness to borrow and spend some of the increase in their wealth, but the survey respondents worry about the sustainability of property prices.