Business confidence improves in fourth quarter

Business confidence improved in the final quarter of last year, but firms continued to have a gloomy view of the future according to the latest Quarterly Survey of Business Opinion.

The New Zealand Institute of Economic Research (NZIER) said a net 6 per cent of firms expected general business conditions to deteriorate over the next six months, compared to a net 16 per cent the previous quarter.

On a quarterly basis, confidence was up across all sector groups surveyed, apart from building material suppliers, whose confidence slipped from a net 22 per cent expecting business conditions to deteriorate in the September quarter, to a net 41 per cent in the December quarter.

Building construction was the most optimistic sector, as it continued to enjoy buoyant conditions in both the residential and non-residential markets.

A net 16 per cent of building construction firms expected business conditions to improve over the next six months. But the quarterly improvement in confidence was not reflected in the annual figures, with almost all sectors more pessimistic than they were in December 2003.

NZIER said tightening monetary conditions had left a slightly sour taste in business leaders' mouths despite the strong economic growth.

The Reserve Bank hiked the official cash rate six times last year, to end 2004 at 6.5 per cent. In December Reserve Bank governor Allan Bollard warned further tightening could be necessary.

But the NZIER said it believed no change in interest rates was likely. Pressure on resources has increased and NZIER said the economy was at "full stretch". Capacity utilisation reached 93 per cent, its highest level since the survey began in 1961.

Labour continued to be a constraint on growth, with a net 61 per cent of firms reporting difficulty finding skilled labour, and a net 41 per cent finding it hard to find unskilled labour.

This compared with 54 per cent and 34 per cent respectively in the September quarter.

Despite the lack of spare resources, the number of firms intending to raise average selling prices over the next three months has fallen from 34 per cent in the September quarter to 28 per cent in the December quarter.

"This survey yields mixed signals to the Reserve Bank on which direction to move interest rates. We believe no change in interest rates is likely, with the balance of risk in the economy weighted towards an increase," NZIER said.

Trading activity in the fourth quarter was slightly down on the previous quarter, with a seasonally adjusted 14 per cent of firms reporting higher trading activity over the three months, compared to a net 18 per cent the previous quarter.

Despite the drop, NZIER said the trading levels suggested solid economic growth in the December quarter. Expectations for growth are high, with a net 20 per cent of firms expecting trading activity to pick up over the next three months.

- NZPA