Resilient business opinion survey sets off the inflation alarms

By BRIAN FALLOW

If the inflation alarm bells were not already clanging loudly at the Reserve Bank, the Institute of Economic Research's latest quarterly survey of business opinion would have set them off.

The survey shows continued resilience in economic activity, but mounting inflationary pressure.

There was a steep increase in the proportion of firms reporting increased costs over the past three months and expecting further cost increases to come.

This was mirrored in a jump in the proportion of firms who either said they had increased their own prices over the past three months or that they expected to do so.

Institute economist Doug Steel said the level of pricing intentions suggested an inflation rate of 3 per cent by the March quarter next year.

The Reserve Bank forecasts inflation to remain above 3 per cent all next year, and it has accordingly raised interest rates three times already this year.

Steel said the survey results would cement expectations that the bank would raise rates again this month, and increased the chances of a further rise in September.

Overall business confidence improved, but remains in pessimistic territory, with a net 20 per cent of firms expecting the general business situation to get worse over the next 12 months, compared with a net 29 per cent in March.

Given the unexpected strength of economic growth in the March quarter, more of an improvement in sentiment might have been expected, but world oil prices hit a peak two weeks before the survey. Two interest rate rises since the previous survey would also have done little to inspire confidence, the institute said.

As usual, firms are more optimistic about their own prospects than about the general business environment.

A net 17 per cent of firms expect a lift in their own production or activity over the next three months, up from 11 per cent last time.

Steel said that was consistent with a gross domestic product growth rate of around 3 per cent in the middle of next year. That would be a modest decline from the 3.6 per cent recorded in the year to March 2004.

But the economy's resources are stretched tight.

The proportion of firms citing labour shortages as the biggest factor limiting their ability to increase output is down only slightly from the 30-year high recorded last month. In the building sector, 53 per cent of firms cite labour as the single most limiting factor.

A net 49 per cent of firms said skilled labour was harder to find.