NZ firms expecting slower recovery

Auckland is holding up in economic activity but Canterbury is falling sharply. Photo / Supplied

Dip in activity blamed mainly on sharp drop in manufacturing output and slightly weaker services sectors.

The New Zealand Institute of Economic Research's quarterly survey of business opinion is pointing to a slowdown in the economy's recovery over the second half of 2012.

The headline measure of business confidence - how firms see the general business situation over the next six months - eased to a net 5 per cent expecting it to get worse from a net 1 per cent negative in the June quarter, when adjusted for seasonal effects.

Most of the survey's indicators of activity over the past three months deteriorated - "slowed", "softened" and "subdued" are the words the institute's principal economist, Shamubeel Eaqub, reached for most often in summarising the findings.

Overall, he said, the survey is pointing to an annual growth rate of about 1.5 per cent over the second half of the year, a loss of momentum from the 2.6 per cent pace recorded in the year ended June.

A net 7 per cent of firms reported weaker domestic trading activity over the past three months, which is down on the previous two quarters (which were flat), lower than they expected three months ago (a pick-up of 8 per cent) and lower than the long-term average (an 11 per cent improvement).

The dip in activity was mainly because of a sharp drop in manufacturing output and slightly weaker activity in the services sectors, Eaqub said.

Regionally the picture was mixed, with Auckland holding up but Canterbury falling sharply.

A net 26 per cent of manufacturers reported a drop in output, and while a net 4 per cent reported higher exports, that was down on the three preceding quarters, down on expectations three months ago and down on the long-term trend.

A net 4 per cent of manufacturers reported lower selling prices - that gauge has been in negative territory for the past year.

The survey's labour market indicators softened.

A net 9 per cent of firms reported a drop in the number of staff they employ - a two-year low - and the survey reversed the June survey's increase in the proportion of firms saying it was getting harder to find skilled labour.

That suggested wage inflation would not pick up much further, Eaqub said.

ANZ economist Mark Smith said a concerted recovery in the momentum of growth would require a more upbeat consumer.

That in turn would depend heavily on the labour market but the survey suggested its recovery would be sluggish.

Firms' pricing intentions remained "contained", Smith said, but the survey's measure of spare capacity tightened, especially among manufacturers, and investment intentions for plant and machinery were in negative territory.

So while the starting point for inflation was benign, supply-side tensions would eventually push core inflation above 2 per cent, he said.

Bank of New Zealand economist Craig Ebert described the survey as "overall, another reasonable one."

"It's slow, but it's still going," Ebert said. "Fundamentally, the economy is dealing with its various headwinds relatively well," he said.

"We forecast this to continue, but with the moderate GDP growth we envisage starting to exert upside pressure on inflation and interest rates through next year."