Exports put spring in nation's step

By BRIAN FALLOW economics editor

Business confidence rebounded strongly in the March quarter, propelled by renewed optimism about the export outlook.

A net 23 per cent of respondent firms in the Institute of Economic Research's quarterly survey expect general business conditions to improve over the next six months, compared with a net 10 per cent three months ago expecting them to worsen.

Deutsche Bank chief economist Ulf Schoefisch said the Reserve Bank would see the result as further vindication of its decision to start raising interest rates early.

"The bank based that decision on the outlook for buoyant domestic demand, tight capacity and rising inflation pressure - exactly the situation reflected in the survey."

Domestic sales increased in all sectors in the March quarter and respondents' expectations of the three months ahead are stronger still.

On the export front manufacturers are significantly more optimistic. A net 42 per cent expect rising export sales, compared with a net 22 per cent three months ago.

The institute expressed surprise at the extent of the lift in export expectations.

"While we believe world demand will recover in 2002, we do not expect growth to be rapid.

"Firms' expectations for export sales imply they believe a strong recovery in world demand will occur. There is a risk these expectations will not be met."

Institute economist Phil Briggs said the question was whether the momentum imparted to the economy by a few years of good export volumes and prices, plus a low exchange rate, would prove strong enough to take the country through a short-term trough in export performance.

"This survey suggests firms at the moment are not seeing too much difficulty in getting through that trough."

Capacity use among manufacturers and builders increased to its highest level since December 1999, and is well above its long-term average.

But there has not been a commensurate improvement in investment intentions.

The number of firms expecting to buy more plant and Machinery over the next 12 months, though up slightly, barely exceeds the number who will keep the chequebook shut.

A key question is whether business investment will pick up.

Bank of New Zealand chief economist Tony Alexander said: "It's a challenge for businesses: if you believe your outlook, for goodness' sake invest."

He expects they will.

"This survey backs up our view that companies will look through this period of weakness in the world economy," said Alexander.

But the survey also gives some evidence of firms choosing the other way of dealing with capacity constraints - rationing production by raising prices.

Reported selling price increases were more widespread in the last quarter and there is a steep rise in the price-raising intentions over the next three months.

Financial services companies expected interest rates to rise, the institute said, but a net positive number of firms in other sectors also intended to raise prices.

Despite the strength of the survey, Deutsche Bank does not believe the Reserve Bank needs to become more aggressive in raising rates than it indicated last month.

Much of the recent increase in retail spending was debt-financed, which by its nature would be self-correcting, said Schoefisch.

Farm incomes, especially dairy farm incomes, were set to fall, slowing demand in rural areas.

The pressures from high immigration were likely to subside gradually as the global environment improved.

And the exchange rate had firmed more than the Reserve Bank expected, curbing inflation.