Companies feel the pinch as rising costs take hold

Business confidence improved marginally in the past three months but remains at historically gloomy levels as companies wrestle with mounting costs and a sluggish domestic economy.

Employment indicators in the Institute of Economic Research's latest Quarterly Survey of Business Opinion released yesterday suggest the business sector will bear the brunt of the slowdown, with the household sector remaining shielded by continued strength in the jobs market.

Half of the firms surveyed expect the general economic situation to get worse over the next six months and only 6 per cent expect it to improve.

The net 44 per cent who are pessimistic is an improvement from a net 49 per cent in March and a net 61 per cent in December.

But it returns business sentiment only to the levels it fell to after the Asian crisis in 1998 and the "winter of discontent" in 2000.

As usual, businesses are more upbeat about their own activity and prospects than about the general environment.

But for the third quarter in a row, more companies report a decline in their own trading activity than report an increase.

The net balance was minus 9 compared with minus 7 in the March survey.

The institute said the last time there had been three negative quarters by this measure was in 1997-98 (when there were six in a row) and before that in 1990-91 (when there were eight).

So far at least the impact of the latest downturn on employment is much milder than during the post-Asian crisis recession. If this continues it suggests less of the pressure the business sector is under will be transmitted to households, buffering the general slowdown.

A net 9 per cent of firms reported a drop in the number of employed, down from a net 4 per cent in March, but a net 1 per cent expect to increase staff numbers over the next three months.

Those levels compare with a net 25 per cent negative in the depths of the last recession.

But the labour market has eased. Fewer firms are reporting difficulty in finding skilled and unskilled labour. Responses to those questions were now at lower levels than the average over the past 10 years, the institute said.

Similarly, the percentage of firms citing the availability of labour as the single factor most limiting their capacity to increase output has fallen from 26 per cent in March last year to 15 per cent now.

Manufacturers and builders report no more spare capacity than in the March survey. Capacity utilisation has been declining since mid-2004 but remains at historically high levels and investment intentions improved.

Overall, institute director Brent Layton said there was little comfort for the Reserve Bank in the survey. A net 36 per cent of companies intend to raise prices over the next three months, up from 26 per cent in March.

But even more reported higher costs - a net 53 per cent, up from 42 per cent in March. Among merchants the gap was even wider.

"It suggests a profit squeeze," Layton said. A net 32 per cent of firms overall and a net 49 per cent of merchants reported a drop in profitability.

ANZ National Bank economist Sean Comber said pressure on margins would remain.

"With slowing activity and the heavy hand of the Reserve Bank reducing the ability of firms to pass on cost increases, the environment for earnings is likely to continue to deteriorate."

Manufacturers struggled, reporting higher costs and declining exports. But although the former are expected to persist, manufacturers expect a rebound in exports in the next three months, buoyed by the lower dollar.