Business optimism stalls as recovery catches up

Business confidence stalled in December as firms wait for the reality of economic recovery to catch up to the sharp jump in expectations seen in the September quarter, according to the December 2009 Quarterly Survey of Business Opinion, released this morning.

A net 23 per cent of firms now expect conditions to improve over the next six months, barely changed from the net 22 per cent positive result recorded by the long-running sentiment survey last September.

"Firms are optimistic about the economic outlook and their recent performance has been improving gradually," said NZIER's principal economist, Shamubeel Eaqub. "The flat-lining of confidence is consistent with businesses remaining optimistic, but waiting for reality to catch up with expectations."

Capacity utilisation - a key measure of economic activity - rose sharply to 91.1 per cent in December, from 88.4 per cent a quarter earlier, suggesting limited spare capacity and potential for price pressure if a strong recovery takes hold.

"However, capacity utilisation has been volatile in recent quarters, particularly in the primary sector," NZIER said.

On the bright side, costs have been falling faster than selling prices, leading to a general improvement in profitability, with manufacturers recording their highest profitability turnaround on record. Only a net 2 per cent of firms expect profits to decline in the quarter ahead.

While the result was consistent with a mid-year increase in interest rates, weak labour market conditions, apparent ongoing reluctance to restock despite improving demand, and the shallowness of the current recovery meant there was "little urgency" to raise rates any sooner.