Businesses wake up to reality of slow recovery

Ample spare capacity in the labour market means wage growth is likely to be restrained for some time. Photo / Derek Flynn

The Institute of Economic Research says its latest survey of business opinion points to an economy on the mend, but to a recovery that is fragile and more gradual than firms expected.

The survey also depicts a two-speed economy, with large firms back in expansion territory while small and medium enterprises are still finding the going really tough, the institute's principal economist, Shamubeel Eaqub, said.

A net 5 per cent of firms, seasonally adjusted, report that their own trading activity fell over the past three months.

It is an improvement on the net 10 per cent going backward in the December survey and a net 45 per cent in the trough of the cycle a year ago, but it remains well below the survey's long-run average of a net 11 per cent expanding.

Labour market indicators remain weak.

While slightly more (a net 2 per cent) firms say they expect to increase than reduce staff numbers over the next three months, their reported experience over the past three months remains one of labour shedding, with a net 15 per cent cutting staff numbers compared with a net 18 per cent in the previous survey.

Hiring, overtime and staff turnover are recovering slowly from their recessionary lows but are still below long-run averages, Eaqub said.

"The pace of recovery [in employment] slackened in the March quarter when you would have expected it to gather pace."

Ample spare capacity in the labour market means wage growth is likely to be restrained for some time.

"Household incomes will be weak and that will hold back the economy."

With income growth subdued and households reducing debt, retailers have sharply lowered their expectations of sales as reality, while improving, continues to fall well short of the optimistic expectations of the two previous surveys.

In the services sector "volumes are improving but there is no follow-through on employment, even though services tend to be labour-intensive", Eaqub said.

In fact, job shedding intensified, with a net 22 per cent reducing staff numbers, compared with 18 per cent in the December survey.

Among manufacturers, as many report a fall in output as report a rise.

Key indicators of the building sector are improving, but from a low level: new orders finally turned positive, output grew marginally and the pace of job shedding slowed.

Meanwhile cost and price pressures remain relatively subdued. Firms are slowly rasing prices but not to the extent they expected.

Labour remains easy to come by and while capacity utilisation is above average, that indicator has been erratic over the past year or so.

"There is no smoking gun in the [survey] for the Reserve Bank to raise interest rates urgently," Eaqub said.

The bank has said since December that it expects to start raising the official cash rate "around the middle of 2010".

Supplementary questions in the survey on credit conditions found them largely unchanged.

"Credit is still difficult to find, but not that difficult," Eaqub said.

Goldman Sachs JB Were economist Philip Borkin said there was a clear theme in the survey of reality failing to match firms' expectations so far.

A net 5 per cent of firms report their own activity had shrunk, but in the previous survey a net 10 per cent had predicted it would increase.

"In fact for the past three quarters firms' experienced activity has fallen well short of the expectations from the previous quarter," Borkin said.