Hesitant recovery as economy fails to match hopes

The New Zealand Institute of Economic Research's quarterly survey of business opinion attests to recovery taking hold, even if more tentatively than firms had hoped three months ago.

Overall confidence stabilised with a net 23 per cent of firms (seasonally adjusted) expecting the general business situation to improve, almost unchanged from the September survey. The three previous surveys had recorded marked improvements from the deeply pessimistic levels prevailing a year ago.

"The economy remains in a holding pattern," NZIER principal economist Shamubeel Eaqub said.

"Expectations are rising across most indicators but these are yet to be translated into action. For example retailers expect sales to surge yet they are not ordering new stock."

Businesses reported an improvement in their own trading activity in the December quarter, consistent with a 0.9 per cent increase in GDP, Eaqub said.

And their expectations of their own activity over the next three months held on to September's gains and remain at levels in line with their long-run average.

Profits were squeezed less as volumes and margins improved, while investment intentions are back close to long-run average levels.

Overall the survey showed the recovery was slowly taking hold, Eaqub said, even if the September survey's "over-exuberant" expectations had been scaled back.

Labour market indicators improved but only from levels last seen in the early 1990s to levels associated with the post-Asian crisis recession.

"Hiring, overtime worked and labour turnover are still well below the long-run average ... job shedding continues, albeit at a reduced pace."

The ease with which labour can be found reduced from the very elevated levels in the first half of last year but remains high by historical standards, suggesting wages will be restrained.

Sectors which had borne the brunt of the recession - manufacturing and construction - reported improved conditions, while retailers and service providers continue to struggle.

A net 23 per cent of manufacturers reported increased output, following a prolonged contraction, with both domestic and export sales rising.

The exchange rate with the Australian dollar - relatively stable around A80c throughout 2009 after hitting 90c in late 2008 - had been helpful, as had the comparatively strong Australian economy, Eaqub said.

Manufacturing employment continued to shrink, however, though more slowly than in previous quarters.

The building sector also improved from a low base, reporting increases in new orders and output and an easing in labour shedding. But architects are expecting a soft 2010.

Retailers' expectations in September proved wildly over-optimistic. In September a net 33 per cent expected higher sales in the December quarter, but three months later a net 20 per cent reported that sales were down.

Firms generally have not raised prices as they expected.

"We are still not seeing particularly high inflation pressure, which suggests the Reserve Bank is right to start raising rates from the middle of the year, as it has indicated," Eaqub said.

Goldman Sachs JB Were economist Bernard Doyle also sees no "smoking gun"' in the survey to push the bank into an imminent interest rate rise.

"We remain comfortable without expectation of the tightening cycle beginning in June."

But ASB chief economist Nick Tuffley said the recession had not generated as much disinflationary pressures as expected and pointed to signs in the NZIER survey of inflation pressures building.

"In particular, capacity utilisation has jumped sharply to levels last seen in mid-2008 when the recession had barely begun. Expectations of higher costs and selling prices are creeping up, presumably as businesses attempt to shore up crushed margins," Tuffley said.

"Labour market indicators point to a degree of slack but it is clear that is starting to wane as well."

He expects the Reserve Bank to start to raise the official cash rate in April.

Deutsche Bank chief economist Darren Gibbs read the survey as pointing to a "reasonably tentative" economic recovery, with growth strengthening only to a trend-like pace still insufficient to reduce unemployment.

CONFIDENCE TEST
* 23 per cent of firms expect the general business situation to improve, the same as in the September quarter.
* 2 per cent of firms expect profits to decline in the March 2010 quarter.
* 18 per cent expect to shed staff.

These are net figures, calculated by subtracting the number of pessimists from optimists.