Business confidence looks up as GDP rises

11.00am

Business confidence improved across most sectors in the June quarter as firms took heart from a surprisingly robust recent GDP figure, a survey has found.

The New Zealand Institute of Economic Research (NZIER) also found that rising costs and inflation were seen by most businesses as a hindrance to future profitability.

The NZIER's Quarterly Survey of Business Opinion, out today, showed a net 20 per cent of firms surveyed expected general business conditions to deteriorate over the next six months.

In the March quarter, a net 29 per cent of respondents expected a deterioration.

NZIER said the 2.3 per cent March quarter GDP (gross domestic product) figure released during the period of the its survey had suggested "reasonably strong growth for the June 2004 quarter, and firms expect this to continue into the September quarter".

The improvement in confidence was seen across all sectors except building, the survey said.

However, a "stark difference" between the higher confidence among building construction firms and the lower confidence among suppliers of building materials "may suggest we are in the early stages of an upturn in building activity".

Meanwhile, NZIER said a net 41 per cent of firms reported cost increases over the quarter compared to 35 per cent last quarter.

The tight labour market and a spike in oil prices during the three months to June 30 were likely to have been major contributors to these increases.

Difficulty finding labour was cited by firms as the most common limiting factor on productivity increases.

The labour shortage was most pronounced in the building sector with 53 per cent of firms in the industry reporting labour as the factor most limiting increases in turnover.

Respondents said profit margins were being squeezed by rising costs particularly in the retail and wholesale sectors where a net 19 per cent of firms reported declining profitability during the quarter.

NZIER said pressure on resources -- as measured by capacity utilisation -- continued to be steady at a 21 year high of 92 per cent.

Inflation indicators in the survey suggested annual consumers' price index inflation would lift to about 3 per cent by the March quarter next year.

NZIER said it and other commentators considered the present 5.75 per cent official cash rate was about neutral.

"Consequently, there is no great surprise that a net 100 per cent of the firms in the financial services sector responding to the survey believe that interest rates will be higher in a year's time."

NZIER said this was the first time in 19 years that all financial services firms had expected interest rate increases.

- NZPA