Business community feeling a little perkier

Business confidence picked up a little in the September quarter but remained near a 30-month low, according to the New Zealand Institute of Economic Research (NZIER)'s latest survey out today.

The institute's Quarterly Survey of Business Opinion (QSBO) showed a net 32 per cent of firms now expected business conditions to deteriorate over the next six months against 34 per cent in the previous survey.

Capacity utilisation remained near historic highs, unchanged from the previous survey on 91.9 per cent.

The Reserve Bank watches the QSBO closely when reviewing interests rates, particularly capacity utilisation data.

NZIER said there were signs that firms were trying to absorb higher costs rather than passing them on, which called into question whether higher interest rates were needed to stifle persistent inflation pressures, it said.

"As last quarter, this suggests that a tightening of monetary policy would exacerbate the slowing in economic activity and may be unnecessary," the private research house said.

Adjusted for seasonal variations, a net 34 per cent of firms expected worse conditions, compared with a net 29 per cent in the previous survey.

"The survey results are consistent with a slow down in activity having been underway for six months or so.

"It is slowing without crashing."

A seasonally adjusted 4 per cent expected their own activity to increase in the next three months, from 12 per cent in the previous quarter.

A net 26 per cent of firms expected to increase prices in the coming quarter, while a net 49 per cent reported higher costs.

That compared with a net 23 per cent and 35 per cent respectively in the previous quarter.

The NZIER said firms' costs were under strong pressure, which was no surprise given the rise in fuel costs.

"They also suggest that firms are not confident they can pass on the increased costs in increased prices."

It said the gap between those experiencing higher costs and those intending to increase prices was the highest since the late 1980s, but it was unclear how long firms would be willing to absorb higher costs.

"This should give the Reserve Bank some confidence that the current cost pressures are not being built automatically into inflationary expectations by business," NZIER said.

A net 43 per cent surveyed had difficulty in finding skilled labour and 23 per cent in finding unskilled labour.

The latest Reuters poll released on Monday showed eight of 15 forecasters expect the central bank to raise interest rates to 7 per cent at its next review on October 27, after staying on hold since its last increase in March.

The Reserve Bank of New Zealand has raised interest rates by 1.75 percentage points between January 2004 and March this year, but has consistently warned further tightening may be necessary to control persistent inflationary pressures in some sectors.

- REUTERS