NZ business bouncing back, oh so slowly: NZIER

Will Christmas shoppers help pull NZ business confidence out of the gloom? Photo / Herald on Sunday

New Zealand's businesses are recovering ever-so-slowly after dodging a 'double-dip' recession, led by larger firms, according to the New Zealand Institute of Economic Research.

A net 3 per cent of firms are optimistic about the coming year, according to the NZIER's December quarterly survey of business opinion, compared to a net 8 per cent of pessimists in the period before.

Firms' own trading activity improved to a net negative 1 per cent from net negative 15 per cent in the third quarter, while expectations for the next quarter rose to a net 13 per cent of optimists compared to a net 1 per cent of pessimists in September.

That comes after government data showed New Zealand's economy shrank 0.2 per cent the September quarter, and the June period was revised down to a wafer-thin 0.1 per cent growth.

"It's a shallow, drawn-out recovery, but it's heading in the right direction," principal economist Shamubeel Eaqub said.

"Confidence is slowly filtering through to new hiring and investment, but this needs to accelerate to drive a sustainable recovery.

"This recovery reflects ... deleveraging in the housing sector. Household savings were probably positive in the fourth quarter, the first time since the early 1990s," Eaqub said.

New Zealand's economic recovery took a knock through the middle of the year as households focused on repaying debt in lieu of boosting spending, forcing the Reserve Bank to put off further interest rate hikes to keep monetary policy at very stimulatory levels.

Hiring intentions was one of the brighter spots in the survey, with actual hiring improving to a net negative 3 per cent in the December quarter compared to a net negative 12 per cent in September.

Eaqub said the labour market remained resilient through the country's worst recession in nearly two decades, and will help underpin wage growth over the coming year.

Still, that's not expected to return to previous levels for some time to come, he said.

Though the tone of the survey was rosier than previously, Eaqub said the fourth-quarter recovery was concentrated in large firms, with small- and medium-sized enterprises struggling to gain traction.

"There was a massive lift in the larger firms, which did much better in the fourth quarter, and the smaller guys didn't do as well," he said.

ASB Bank economist Christina Leung said today's survey painted a picture of the New Zealand economy gradually improving, while inflation pressures remained contained.

She said it was encouraging to see the improvement in business activity was broad-based across different sectors.

"In particular, the manufacturing sector reported a rebound in activity on the back of improvement in both domestic and export sales. This is positive for the economic recovery given manufacturing is a key sector of the NZ economy, and activity in this sector was one key area of downside surprise in the recent GDP report," said Leung.

The recovery in activity meant that businesses were keeping expansion plans on track, with a slight improvement in investment intentions.

"Businesses are indicating increased difficulty in finding skilled labour, and we expect this will flow through to emerging wage pressures over the coming year," said Leung. "Meanwhile, businesses reported easing cost pressures, and fewer businesses are reporting they intend to raise prices. These measures suggest inflation pressures remain contained for now."

She said the Reserve Bank would "be encouraged by today's release, given it indicates a broad-based improvement across sectors albeit at a gradual pace."

Leung said she now expected expect the June meeting will be the earliest 'live' meeting for the Reserve Bank to contemplate resuming the reduction of monetary policy stimulus.

Goldman Sachs NZ economist Philip Borkin said he continued to believe the Reserve Bank could hold off raising interest rates until September.

Borkin said the theme of the survey was "modest improvement."

The NZIER said one of the biggest drags on the recovery was the lack of demand in households to ramp up spending, which was forcing retailers to hold off lifting prices.

That in turn was weighing on profitability and would act as a damp on businesses' investment intentions.

Profitability was still a concern, with increased margins offset by tighter margins, said NZIER's Shamubeel Eaqub said.

Experienced profit improved to a net negative 21 per cent from 30 per cent in September, and expected profit gained to net negative 5 per cent from 14 per cent.

The survey was the NZIER's first which captured the 7.1 magnitude Canterbury earthquake, which showed trading activity slumped to a net negative 33 per cent in the region, from a net negative 6 per cent in September.