Business confidence improves again

By BRIAN FALLOW

Business confidence strengthened further this month and is back at a level consistent with robust but sustainable economic growth, the National Bank said.

Of the 696 respondents in its latest survey, 34 per cent expect general business conditions to improve over the next 12 months, offset by 14 per cent expecting them to worsen.

The net 20 per cent positive outcome, up from 16 per cent last month, was bang on the average over the survey's 14-year history, said the bank's chief economist, Dr John McDermott.

"It is what it should be if you have got the economy in balance, running at its potential, which right now is about 3 per cent [growth]."

Further improvement in business confidence could be expected, given the way the domestic economy was going, he said.

Firms' confidence about their own activity has also improved and is now significantly above its historical average. Investment intentions have held steady at levels above their long-term average.

McDermott said other indicators of business investment had also improved over the December quarter, such as imports of capital goods and reported capital expenditure among manufacturers.

"In the manufacturing sector, where capacity utilisation is high, firms are now thinking it is worthwhile to expand," he said.

Business New Zealand economist Peter Crawford said some manufacturers benefited from the buoyant construction sector.

Australia, the largest export market for manufactured goods, had been growing strongly and there had been a pick-up in exports of electronics and communications equipment to the United States.

"But while things are good now, there is still uncertainty about the strength of growth going forward and about how fast the US recovery will be," he said.

The National Bank's survey is not all good news.

Firms' expectations of where the prices of their goods or services will be in three months have risen, with a net 25 per cent of respondents expecting increases.

It is the fourth consecutive survey in which pricing intentions had risen and they were now well above trend in every sector except agriculture, McDermott said.

On the other hand the medium-term drivers of inflation were not firing. Wage costs were contained, demand was roughly in balance with potential supply and a stable exchange rate over the past year combined with excess capacity in the rest of the world to lower the cost of imports.

A steadily appreciating dollar would allow firms that sold imported goods to rebuild profit margins without raising prices.