Business confidence surges as export sales weaken

10.30am

Optimists in the business sector are outweighing the pessimists for the first time since June last year, according to a poll of business opinion.

A net 23 per cent of firms over the March quarter said they expected business conditions to improve over the next six months, according to a quarterly survey by the New Zealand Institute of Economic Research (NZIER).

That compares with a net 10 per cent expecting a deterioration in the last survey. Prior to that, the survey recorded its biggest net fall in confidence for 30 years, following the September 11 attacks.

After removing regular seasonal variation, a net 3 per cent expected conditions to get better.

The NZIER said confidence increased across all sectors of industry with the largest improvement occurring in the service sector.

The optimism was driven by a large rise in firms' expectations of higher export sales, although an easing in export sales at the moment suggested it had yet to kick in.

The building sector was the most optimistic, boosted by a surge in the domestic housing market. A net 29 per cent of firms expected an increase in new orders over the next three months, compared with a net 8 per cent in the last quarter, and a net 36 per cent expected output to rise, up from a net 2 per cent of firms previously. Architects reported a big improvement in the outlook for housing work over the next two years.

For the first time in over 12 months, the institute noted that firms' confidence in the general business situation had returned to a level that was consistent with firms' own assessment of their output and sales activity.

It said encouraging signs of recovery in the US might have lifted some of the anxiety firms were feeling, boosting their export expectations.

The NZIER was more cautious, saying the magnitude of the lift in export sales hopes was "a little surprising".

"While we believe world demand will recover in 2002, we do not expect growth to be rapid. Firms' expectations for export sales imply they believe a strong recovery in world demand will occur. There is a risk that these expectations are not met."

However, production and sales indicators did meet the institute's expectations. They were resilient over the March quarter, with domestic sales increasing in all quarters.

Manufacturing and building capacity was also at a historically high level, its highest since December 1999. Despite this, firms remained cautious about investing in buildings and plant.

The institute suggested this could change over the next few months, putting upward pressure on prices.

More firms were planning to raise their prices over the next quarter. If they followed through, this would generate inflation, prompting the Reserve Bank to raise interest rates, the NZIER said.

A net 89 per cent of financial service arms now expected higher rates in the next year compared to a net 7 per cent in the previous survey.

GDP was expected to weaken to 1.7 per cent for the year to March 2003.

On the labour market, an easing of the skills shortage recorded in the last quarter did not last. Firms found it more difficult to find both skilled and unskilled workers during the March quarter. A net 3 per cent of firms increased their staffing levels during the March quarter, and a net 5 per cent planned to over the next three months.

Prices rises became more widespread in all sectors, except manufacturing, while cost increases were less common. The number of firms expecting cost increases remained steady and as a result, a net 13 per cent expected profitability to rise over the next quarter.

In the manufacturing sector, a net 14 per cent of firms reported an increase in output this quarter, compared to a net 23 per cent last time but a net 33 per cent expected to boost production over the next three months.

A net 42 per cent of manufacturers expected export sales to increase over the next quarter, up from a net 22 per cent previously.

In the service sector, where confidence was highest, a net 22 per cent of firms expected conditions to improve compared with 18 per cent last quarter. This was based on a net 25 per cent reporting a rise in the volume of services, the largest rise since March 1996.

- NZPA