WELLINGTON: Businesses are feeling positive about the year ahead and along with the robust levels of confidence, employment and investment intentions also remain firm. The New Zealand Institute of Economic Research’s December Quarterly Survey of Business Opinion (QSBO) reported a net 26% of businesses expected an improvement in economic conditions in coming months. Although there was a modest softening in demand in their own business, activity indicators remained higher than a year ago, senior institute economist Christina Leung said. ”This indicates continued solid momentum in the New Zealand economy, which should provide a buffer against the downside risks from unexpected events both here and abroad.” Businesses were particularly buoyant in Southland, as confidence reached its highest level since early 2014, she said. The continued recovery in global dairy prices had supported higher business confidence in the rural regions over the past year. Business confidence was also high in Wellington, with little sign the recent earthquakes had dented confidence.
Business confidence was high across the sectors but remained strongest in the building sector Ms Leung said. Higher building sector confidence reflected continued strong demand in construction, although architects’ work in their own office suggested some softening in pipeline growth in residential, commercial and government construction. There had also been an easing in shortages for both skilled and unskilled labour in the building sector, likely reflecting the effects of the surge in net migration over the past year. Solid household demand underpinned a rebound in retail confidence and retailers were looking to invest for expansion despite weakening profitability in an increasingly competitive environment. Capacity utilisation rebounded to 92.7% in the December quarter and more businesses reported capacity as a constraint, Ms Leung said. Businesses were finding it easier to raise prices and a net 7% of businesses raised prices in the December quarter – a turnaround from the net 4% cutting prices in September.
Improved pricing power pointed to a lift in inflation in the year ahead. As the risk of persistently low inflation dissipated, the Reserve Bank had indicated it was unlikely to cut interest rates further. The institute expected the Reserve Bank to keep interest rates on hold at 1.75% until mid-2018 before embarking on a gradual tightening cycle, she said. ASB senior economist Jane Turner sounded a note of caution about the pricing intentions of businesses because the lift in fourth-quarter selling prices was not broad-based across all industries. The building and service industries had a strong lift in the net percentage of firms reporting an increase in selling prices. The tourism and construction industries were where ASB economists expected to see tightening capacity pressures. However, merchants reported a sharp drop in the net percentage reporting an increase in selling prices, she said. ”As retailers tend to be mostly importers, this suggests the high dollar is continuing to hold back tradeable inflation.” The dichotomy between industry trends highlighted the downside risks to inflation not not entirely evaporated.
