Cost pressures are growing but retailers feel increasingly confident they can raise prices, according to the latest NZ Institute of Economic Research's Quarterly Survey of Business Opinion.
While there had been a slight softening in demand it was generally holding up pretty well, said NZIER principal economist Christina Leung.
"It's more the supply side issues that are the dominant feature for the retail sector and which are effecting confidence."
Business sentiment improved slightly in the March quarter according to the survey.
But the results were uneven, with retailers generally becoming more pessimistic, Leung said.
Overall, the results suggested a continued recovery in the New Zealand economy, with the domestic trading activity measure pointing to (annual) GDP growth of around 2 per cent in the March quarter.
"So the issue is the inability of retailers to restock shelves," she said. "We would expect that a large part of that relates to Covid supply chain disruptions."
Firms reported finding it easier to pass on higher costs by raising prices, which was encouraging, she said.
A net 8 per cent of firms raised prices in the March quarter – a turnaround from the net 2 per cent which cut prices in the previous quarter.
"These results suggest a pick-up in inflation pressures over the coming year," she said.
"We've seen that come through in terms of interest rate expectations over the coming year. That has shifted from firms expecting the next move to be lower to expecting the next move for rates to be higher."
The latest Retail Radar survey of Retail NZ members also showed two thirds of retail businesses expect to see prices increase over the next quarter.
Retail NZ told the Herald last week the message it had received from its members was that "prices are expected to start creeping up" over the next three months across a broad range of goods.
But despite this increase in pricing power the NZIER survey showed firms' profitability remained weak, with a net 21 per cent reporting reduced profitability in the March quarter, Leung said.
Profitability was particularly weak in the manufacturing sector, reflecting the surge in costs in the sector.
Firms were struggling to raise prices fast enough to keep up with rising costs and avoid shrinking margins, Leung said.
"So costs are continuing to weigh on profitability and, on balance, retailers remain pessimistic about profitability over the coming year."
When it came to hiring and investment intentions the results were brighter.
A net 8 per cent of firms increased staff numbers in the March quarter, and a net 18 per cent planned to hire in the next quarter.
A net 7 per cent of firms expect to increase investment in buildings over the coming year and net 15 per cent of firms are planning to increase investment in plant and machinery.
"Businesses are increasingly considering the use of labour-saving technology, given rising labour costs and border closures limiting the ability of businesses to hire workers from overseas," Leung said.
This is a trend that economists have hoped to see as it is likely improve productivity levels in the New Zealand economy.
Leung said she was surprised by how downbeat the building sector was given the extent of activity.
"Despite the solid pipeline, building sector firms are felling more pessimistic about the general economic outlook."
Again, it appeared to be the supply side weighing on confidence, she said.
The sector was struggling with shortages and cost pressures on both material and skilled labour, she said.
"A record proportion of building materials firms are reporting stock levels are too low. Add then also within the building construction sector the shortage labour is at its most acute since 2017.
The New Zealand Institute of Economic Research has conducted its Quarterly Survey of Business Opinion since 1961.
It is New Zealand's longest-running business opinion survey. Each quarter around 4300 firms are asked whether they think business conditions will deteriorate, stay the same, or improve.
- The Reserve Bank releases its latest Monetary Policy Review - including an official cash rate decision - at 2pm tomorrow (Wednesday).