Business confidence down to levels of early 1990s

Business confidence worsened in the three months to June according to a survey by independent economic research group the New Zealand Institute of Economic Research (NZIER).

The group said a net 34 per cent of firms now expected business conditions to deteriorate over the next six months, against 28 per cent of pessimists in the March quarter and 6 per cent in the December 2004 quarter.

The NZIER said the current low level of business confidence had only been seen "a handful of times since the early nineties".

Some sectors had seen softening of growth, and cost and price pressures remained widespread, NZIER said.

But on the key own activity measure, firms were overall optimistic about their own prospects over the next three months. "But profitability is coming under increasing pressure and resources are still stretched, giving firms little flexibility in absorbing rising costs."

A net 35 per cent of firms reported increased average costs over the three months to June and a net 38 per cent expected further increases over the current quarter.

NZIER said confidence fell across the country except in those regions and sectors where it was already low.

Confidence improved marginally in the South Island, but it remained the most pessimistic region and was the only one to report a net decrease decline in staff numbers.

The institute said firms were still reporting considerable capacity constraints, with capacity utilisation -- the level of use of resources within the economy -- at 91.9 per cent, down a touch from 92.3 per cent in the March quarter.

While there was a "sharp decrease" in the number of firms reporting difficulty finding labour during the quarter compared to the previous three months, a shortage of skilled and unskilled workers remained a major constraint on growth, NZIER said.

On the bright side firms' investment intentions remained high, "which bodes well for keeping the economy on an even keel over coming quarters".

The institute said its survey suggested that despite continued signs of inflationary pressure, the Reserve Bank would keep interest rates on hold at its next rate call on July 28.

- NZPA