Companies feel the squeeze

Companies are feeling the squeeze from mounting costs and a tight labour market, the Institute of Economic Research's quarterly survey of business opinion has found.

But although the survey contains little to reassure the Reserve Bank that inflation pressures are easing, economists expect the bank to leave interest rates on hold when it next reviews them on April 28.

Despite high levels of investment in plant and machinery, firms reported little room to increase production.

The survey's capacity utilisation measure, which the Reserve Bank watches closely as an inflation indicator, fell slightly compared with December. But the December figure was a 44-year high and all of the decline occurred among exporting firms.

Labour shortages are continuing, with 26 per cent of firms citing them as the factor most limiting their ability to increase sales. That is the highest level for more than 30 years.

A net 60 per cent of firms found it harder to get skilled labour, yet fewer firms said they were looking to hire.

Institute economist Grant Andrews said the decline in hiring intentions did not necessarily indicate a lack of confidence. "It could be a reluctance to go into the market in light of the difficult recruitment environment."

Deutsche Bank chief economist Ulf Schoefisch said the shortage of skilled labour seemed to be levelling off. "It's not getting worse, but it's not getting better in a hurry," he said.

A net 40 per cent of firms reported higher costs (up from a net 35 per cent three months ago) and the same number expected to face increased costs over the next three months.

"However, the survey confirms a competitive market makes it difficult for firms to pass cost increases on," Schoefisch said. "While a net 40 per cent experienced cost increases in the March quarter, only a net 23 per cent reported an increase in output prices."

The proportion of firms saying they intended to raise their prices was consistent with inflation close to the top of the Reserve Bank's 1 to 3 per cent target band.

Instead, profits were under pressure. More firms reported declines in profitability than rises, especially manufacturers and South Island firms, the institute said.

ANZ National Bank economist Sean Comber said the survey confirmed that the economy had indeed reached a turning point, as the Reserve Bank said in its March monetary policy statement.

Unless Friday's inflation number was a "rip-snorter" ANZ expected the Reserve Bank to hold interest rates from here.

Schoefisch also expected the Reserve Bank to leave the official cash rate unchanged this month.

Growth was slowing in a fairly gradual fashion, but that did not mean inflationary bottlenecks were easing yet.

"It is a puzzle that the vast amount of investment going into the economy isn't creating more breathing space," he said.

But it was normal for the growth to fall before inflation did.

Bank of New Zealand economist Dean Ford said there were tentative signs that growth was at last slowing but the economy still retained a good deal of momentum.

"The Reserve Bank will remain under pressure and will probably lift its cash rate to 7 per cent [from 6.75 per cent now] by June, if not later this month."

Aussies lose confidence too

Australian business confidence fell for a second month in March as employment and new orders dropped, a National Australia Bank survey shows.

The falling confidence prompted NAB to predict the Reserve Bank of Australia would not raise interest rates again this year.

The business confidence index declined to 4.3 from 4.5 in February.

Australia's economy grew just 0.1 per cent in the fourth quarter, as home building fell and companies reduced inventories. On March 2, the RBA raised its benchmark interest rate to 5.5 per cent.

Alan Oster, chief economist at NAB, forecast that the A$798 billion ($856.7 billion) economy would grow 2 per cent this year.

- BLOOMBERG