Firms start year with confidence

Led by Auckland, businesses start 2013 more confident than they have been for years, the New Zealand Institute of Economic Research's quarterly survey of business opinion has found.

A net 16 per cent of firms recorded an increase in their own trading activity in the December quarter, after a net 9 per cent had reported going backwards in the September survey.

Even when adjusted for seasonal effects, this indicator improved by 12 points to the highest level it has been since June 2007, before the recession.

It is consistent with annual economic growth of around 2.3 per cent, according to the institute's principal economist, Shamubeel Eaqub.

Trading activity has been stronger in Auckland than the rest of the economy for the past couple of years.

The strength of the Auckland housing market was part and parcel of a bigger recovery in the region, Eaqub said. Its population was still growing and it might have benefited from a post-earthquake relocation of some businesses.

Activity also rebounded in Canterbury but that was heavily concentrated in the building sector.

Nationwide, all sectors recorded more activity, but builders led the pack.

Manufacturers' output rebounded strongly from a startlingly weak September survey, driven by domestic sales. Much of the manufacturing sector is devoted to producing inputs for the construction sector.

"Merchants reported stronger retail spending too, although 80 per cent of the responses were received before mid-December so do not incorporate the Christmas trading period," Eaqub said. But prices were flat and a net 38 per cent were worried about holding too much stock.

The services sector also reported a rebound in activity, though only to historically modest levels.

Eaqub said the disappointing aspect of the survey was the weakness of its labour market indicators.

A net 3 per cent of firms shed staff in the past three months.

He doubts a skills mismatch between demand and supply is a major factor; if it were, wages would be rising more than they are.

"Outside of Canterbury firms are saying labour is relatively easy to find, unlike the experience of earlier recoveries. This suggests only gradual wage increases over the next year."

The amount of spare capacity reported by manufacturers and builders shrank and is below the long-term average but Eaqub said that reflected capacity pressure intensifying in Canterbury while it was still near recessionary lows elsewhere.

Investment intentions for plant and machinery rose, boosted by Canterbury. In the rest of the country investment intentions are around the historical average.

Firms reported an easing in cost pressures, and fewer expect to raise their own prices than three months ago.

The QSBO's inflation gauges were consistent with inflation of just over 1 per cent, Eaqub said.

"The Reserve Bank will raise [interest] rates only after there is evidence inflation has picked up and we don't see that happening until 2014."

It was appropriate for the bank to be reactive, he said.

"There are far too many global risks for them to be proactive. They should be circumspect."

ANZ economist Mark Smith said the outlook implied by the QSBO was for a moderate recovery, with a housing-induced pick-up underpinning sentiment in Auckland and the services sector.

However, the durability of the upturn would depend on an improving outlook for employment and in that respect the QSBO sounded a note of caution.

"With the QSBO suggesting a run of moderate annual growth rates and a benign inflation starting, the Reserve Bank will be in no hurry to raise the official cash rate," Smith said.

"There is time to wait. We have seen lifts in sentiment before, only for the momentum to fade."

Like NZIER, ANZ expects the Reserve Bank to keep the official cash rate on hold until early next year.