Firms look to better times ahead

New Zealand Institute of Economic Research's principal economist Shamubeel Eaqub. Photo / Brett Phibbs

Business confidence has rebounded to pre-earthquake levels in the National Bank's monthly survey.

A net 38 per cent of respondents expect general business conditions to be better in a year's time, up 24 points from April and 47 points from the post-quake lows in March.

Confidence remains below where it was during the recovery period from mid-2009 to mid-2010, but much closer to those levels than the recessionary depths of 2008.

When asked about their own firms' activity, 48 per cent expect improvement over the year ahead while 8 per cent expect it to decrease. The net 40 per cent positive is an improvement of 10 points from April and back to the levels prevailing between March and May last year.

Almost all of the indicators in the survey strengthened, including investment intentions, hiring intentions and profit expectations.

The bank's chief economist Cameron Bagrie, said that, setting the earthquake to one side, a number of factors underpinned improving business sentiment, including high commodity prices, a global economy in better shape than last year and loose financial conditions.

"But business is still pretty cautious. They want to see concrete signs of improvement before they are ready to commit cold, hard cash."

A composite growth indicator drawn from the survey was pointing to 4.5 per cent economic growth over the year ahead.

But the same was true this time last year and reality failed to live up to expectations, he said.

While it was never wise to place too much weight on any one indicator, time and again confidence surveys had proven adept at picking turning points in the business cycle, Bagrie said.

The survey recorded a lift in firms intending to raise their prices and in their inflation expectations. "The lift is not worrying yet, but watch this space," he said.

Meanwhile the New Zealand Institute of Economic Research's Quarterly Predictions, to be released today, see a gradual but sustainable recovery ahead from the soft patch the economy is in.

The institute's principal economist, Shamubeel Eaqub, is forecasting 0.3 per cent annual average growth for 2011 followed by a strong rebound to 3.7 per cent next year. The consensus is 3.9 per cent.

He expects the reconstruction of Christchurch to be in full force by the middle of next year. But both household and government spending will be slow as both sectors pay down debt.

That would mean a slower recovery, but a more sustainable one, Eaqub said.

Eaqub said his favoured leading indicator, house sales, was recovering from historic lows. "This means the economy should recover from the current slowdown later this year. However, the level of house sales is still very low, mirroring an economy recovering from a low base."

And the regional picture is mixed, with Auckland, Waikato and Otago improving while other regions were flat or slowing.

Like the respondents to the National Bank survey, Eaqub sees inflationary pressures building. "The Reserve Bank will need to raise rates next year towards 4 per cent to offset these inflationary pressures."

For now, a high New Zealand dollar was helping to keep a lid on inflation and he expects it to remain high for some time.