Business confidence slips as economic growth slows

Interest rate rises and the strong Kiwi dollar are thought to be factors in the recent fall in business confidence. Photo / Natalie Slade

Business confidence has fallen in the New Zealand Institute of Economic Research's latest quarterly survey of business opinion, flagging a moderation in the pace of economic growth.

A net 33 per cent of the survey's respondents expect the general business situation to improve, a strong level by historical standards but down from the readings above 50 per cent in the two previous surveys, which had not been seen for 20 years.

A net 15 per cent reported improvement in their own trading activity, down from a net 24 per cent in March but still above the long-run average of a net 11 per cent positive.

That was consistent with annual gross domestic product growth moderating from 3.8 per cent in March to 2.8 per cent in June, said NZIER principal economist Shamubeel Eaqub. "The level of activity is pretty positive but the momentum is coming off."

It was too early to say that we had seen the top of the cycle, he said.

Deutsche Bank chief economist Darren Gibbs said three interest rate increases by the Reserve Bank, persistent strength in the New Zealand dollar and falling global dairy prices were likely to explain the fall, which had also been seen in the monthly ANZ business outlook survey.

Eaqub said all regions were recording expansion but momentum had slowed in Auckland, the southern and eastern North Island and Southland. Similarly every sector - services, merchants, construction and manufacturing - remained in expansion mode, though trading activity had moderated.

The proportion of manufacturers reporting increased exports fell sharply from a net 30 per cent in the March survey to a net 10 per cent.

The building sector sent mixed signals, with a drop in new orders but strong employment growth.

Overall, hiring (reported and intended) picked up and firms reported difficulty finding the workers they need, especially skilled labour.

The proportion of firms citing capacity as the single most important factor limiting their ability to increase turnover has risen over the past year, to a 10-year high, and not only in Canterbury; in the rest of New Zealand this indicator is at levels prevailing during the mid-2000s boom.

A net 19 per cent expect to invest in plant and machinery, maintaining the historically high levels of investment intentions evident in the previous two surveys.

If mounting capacity pressures portend inflation pressures in the medium-term, the near-term picture is one where reported cost pressures are steady at historically low levels, with a net 20 per cent saying they had risen over the past three months.

However, a net 23 per cent of firms report they have raised their own prices over the past three months and a net 33 per cent intend to over the next three months. That level of pricing intentions pointed to an inflation rate around 2.5 per cent by the end of the year, Eaqub said.

ASB economist Daniel Smith said it was rare for the proportion of firms intending to raise prices to be much higher than the proportion expecting and experiencing cost increases. "That suggests that firms are choosing to raise their prices in order to bolster margins, rather than being forced to push prices up due to cost increases." Gibbs said the Reserve Bank would welcome further signs that business confidence and activity indicators were beginning to transition to levels more consistent with a sustainable rate of economic growth.

Read NZIER's release here: