Business smiles reinforce signs of economy's improvement

By BRIAN FALLOW economics editor

Business confidence has rebounded sharply in the Institute of Economic Research's quarterly survey, adding to evidence that the economy has shrugged off its June quarter weakness.

A net 3 per cent of firms expect the general business situation over the next six months to get worse, but that is up sharply from the net 20 per cent pessimistic rate of three months ago.

The institute said that adjusted for seasonal effects, a net 14 per cent of respondents were now optimistic, a turnaround from the net 13 per cent pessimistic in the June survey.

The less volatile domestic trading activity measure, a better indicator of economic growth than overall business confidence, points to strong growth in the September quarter.

Trading activity is expected to lift further in the next three months.

A net 33 per cent of firms expect to be busier over the next three months, up from 19 per cent in June.

Cost and price increases were more widespread than in the previous survey.

But the closely watched capacity utilisation index - a measure of spare capacity among manufacturers and building firms - dropped to its lowest level since December 2000.

The drop was not confined to manufacturers.

As output had gone up over the same period, the drop in capacity utilisation suggested firms had invested in additional capacity in recent quarters, the institute said.

That would be consistent with the above-average investment intentions they had reported.

But labour indicators in the survey suggest an economy still at full stretch.

Hiring intentions are strong.

"Apart from one quarter in the mid-1990s, employment intentions are the strongest since 1974," institute economist Doug Steel said.

Firms reported increased difficulty in finding skilled and unskilled staff, and 16 per cent said labour was the single factor most limiting their ability to increase output.

"This will put upward pressure on wages," the institute said.

A net 15 per cent of firms - most non-exporters - intend to raise their prices over the next three months, up from 4 per cent in June.

Confidence among exporters has improved as concerns about the international trading environment ease, but the strength of the New Zealand dollar continues to weigh on sentiment.

Only a net 4 per cent of exporters are optimistic about the general outlook, seasonally adjusted, compared with a net 17 per cent of non-exporting firms, which benefit from strong domestic demand.

Manufacturers have gone from a net 23 per cent expecting worse times in June to a net 6 per cent expecting better ones this time.

The change was similar among merchants, from a net 30 per cent pessimistic in June to a net 3 per cent in the latest survey.