Dollar's rise leads to gloom

By JIM EAGLES

New Zealand businesses have started the new year in an unseasonably gloomy state of mind.

The Institute of Economic Research's quarterly survey of business opinion for this month, released yesterday, shows that at a time of year when businesses are usually fairly optimistic, a net 2 per cent - pessimists minus optimists - expect business conditions to deteriorate over the next six months.

When adjusted for seasonal conditions, that equates to a net 11 per cent pessimism, leading the institute to comment that "business confidence is low for this time of year".

The figure represents a marked turn for the worse since the previous quarter, when the seasonally adjusted result showed a net 10 per cent expecting things to improve.

The relative gloom is also in sharp contrast to the buoyant domestic trading environment.

The survey found that a net 31 per cent of firms had increased business over the past three months and a net 22 per cent expected to continue to expand in the next three months.

So why the pessimism?

The institute believes "the high and increasing value of the New Zealand dollar appears to have been a key factor in keeping business confidence low".

The high dollar "appears to have more than offset the effect of a recovery in international demand".

That view is supported by a widening gap between the views of exporting and non-exporting firms.

"A net 11 per cent of exporting firms in the manufacturing and building sectors now expect general business conditions to deteriorate over the next six months, while a net 14 per cent of non-exporting firms expect conditions to improve over the same period."

Of the various sectors surveyed, only the building sector, boosted by the surging housing market, is optimistic.

"Manufacturers are the gloomiest sector as the unrelenting rise in the New Zealand dollar continues."

There is also a growing divergence between the "primary and manufacturing-focused" South Island and the "service sector-focused" North Island.

The institute says the gap between the two is "at its largest since the beginning of the regional confidence survey in 1990".

But, it adds, the impact of the currency surge is not all bad because it has made imported capital equipment cheaper.

Plans to invest in plant and machinery, and in buildings as well, rose in the past quarter and are now well above long-run averages.

In particular, the net 12 per cent of companies intending to invest in plant and machinery over the next 12 months is the highest level since 1995.

The survey also indicates that demand for labour is likely to continue to be strong.

A net 19 per cent of firms said they employed more staff in the December quarter, the highest increase since 1994, and a similar proportion intend to take on staff over the next three months.

Unsurprisingly, firms report increasing difficulty in hiring both skilled and unskilled staff.

A net 27 per cent now say it is more difficult to find unskilled staff, which is the highest level recorded since the series began in 1975.

The institute warns that this will "eventually put upward pressure on wages".

In fact, it says, the survey indicates that inflationary indicators are rising generally, pointing to annual increases in the consumers price index of above 2 per cent within the next few quarters.

A net 25 per cent of firms expect costs to increase in the next three months.

Overall, the institute sees the survey results as pointing to a gradual slowdown in economic growth.