Activity levels reported by firms in the New Zealand Institute of Economic Research's quarterly survey of business opinion are consistent with an economy growing at about a 2 per cent annual pace, its principal economist, Shamubeel Eaqub, says.

But overall sentiment, which has been volatile, took a sharp turn for the worse.

Three months ago a net 21 per cent of respondents expected the general business situation to improve but the latest survey found a net 1 per cent expecting a deterioration, the weakest reading since March last year.

Most of the responses came in during the first half of June, when eurozone concerns were particularly high.


"The recovery remains very modest," Eaqub said.

In an environment where people were concerned to reduce debt, confidence and low interest rates were not flowing through into activity with their normal force.

Some of the survey's nationwide indicators masked a two-speed economy, with a rebound in Canterbury, from a low base, accompanied by stagnation elsewhere, he said.

For example, a net 2 per cent of firms expected to increase investment in plant and machinery over the next three months, but excluding Canterbury the net balance was negative.

Some of the survey's indicators continued to record a disappointing gap between what firms expected in the previous quarterly survey and what they subsequently experienced.

Three months ago a net 5 per cent of firms expected to increase staff numbers, but in the event a net 4 per cent shed staff - even with double-digit increases in Canterbury for the second quarter in row.

"The pace of improvement in the labour market has flattened, so wage inflation outside Canterbury should be fairly subdued," Eaqub said.

Firms are, however, finding it more difficult to recruit labour, especially the skilled. BNZ economist Craig Ebert said that suggested a falling unemployment rate.


"The degree of difficulty in finding staff certainly fits with the net loss of migrants New Zealand is experiencing, the firm demand for labour and the sort of pick-up in wage inflation we've witnessed to date," he said.

Eaqub said Canterbury was rebounding from earthquake-related disruption and damage.

"Construction activity in particular appears to be picking up."

The slump in construction outside Canterbury had found a bottom but recovery was not yet evident, he said.

In the retail sector a net 4 per cent of firms said they had cut average selling prices in the face of stagnant demand.

"Margins are razor thin," Eaqub said, with a net 15 per cent of retailers, and a net 13 per cent of all firms, reporting lower profitability.


Manufacturers reported falls in output and employment, though sales rose as historically high inventories were run down. Manufacturers' spare capacity increased compared with the three previous quarters to a level in line with the long-run average.

The services sector continued on a sawtooth recovery track from the recessionary depths three years ago in terms of activity, profitability and employment, but levels are still low compared with the pre-crisis years.

ANZ economist Mark Smith said the outlook implied by the June survey of business opinion was for only a moderate recovery and not the typical cyclical upswing in the years following a recession. He said with the survey suggesting a moderate growth trend, the Reserve Bank would be in no hurry to raise the official cash rate.

House sales push up retail spending

Retail spending charged to electronic cards rose 0.4 per cent last month, building on strong increases in May and April.

When spending in car yards and petrol stations is excluded, "core" retail card transactions rose 0.9 per cent, seasonally adjusted, following rises of 0.8 per cent in May and April. Statistics New Zealand (SNZ) estimates transactions paid for by debit, credit or charge cards capture 65 per cent of of core retail spending


The increase was broad-based, apart from apparel (down 0.3 per cent) and fuel (down 4 per cent, reflecting lower prices at the pump).

"In particular discretionary spending such as major household items and eating out continue to increase," ASB economist Christina Leung said. Spending on durables rose 0.5 per cent and hospitality 3.1 per cent.

"Spending on durables tends to increase in line with house sales, as households purchase furniture and appliances to furnish their new homes. The latest REINZ house sales data for June indicate housing demand remains strong, particularly in Auckland and Christchurch."

Infometrics economist Matt Nolan said with fuel prices falling people had more income to spend on other things, which helped drive up core retail spending even as they remained reluctant to increase borrowing.

SNZ's trend measure, which adjusts for seasonal fluctuations and short-term irregular movements, has been rising steadily since the start of the year.