NZ economy is on the mend - survey

NZIER principal economist Shamubeel Eaqub

A key business survey suggests the economy is on the mend, but while firms expect a significant acceleration in the December quarter, recent performance was weak.

The New Zealand Institute of Economic Research's (NZIER) quarterly survey of business opinion (QSBO) found a net 27 per cent of firms were optimistic, seasonally adjusted, in the September quarter, the highest level in a decade. That was up from 14 per cent net pessimists in the previous three months.

Firms expected a significant acceleration in activity in the December quarter, but until firms started to rebuild more assertively, any recovery would be gradual, NZIER said releasing the survey today.

The QSBO provided strong evidence the worst of the recession was over, but there was considerable disparity between expectations and reality.

"While firms are clearly more confident about the economic outlook, their recent performance has been weak and they remain cautious about hiring more staff or lifting investment," NZIER said.

The spring flush of optimism was not based on recent trading activity, which remained negative despite improving. The net percentage of firms experiencing an increase in domestic trading activity, seasonally adjusted, was -20 per cent in the latest quarter from -35 per cent in the June quarter.

The recession had freed up significant spare capacity in the economy, with capacity utilisation of manufacturers and builders falling from 90.7 per cent to 88.4 per cent and firms reporting labour remained easy to find, NZIER said.

A net 39 per cent of firms reported declining profits in the September quarter, although the outlook was better with only a net 3 per cent of firms expecting profits to decline in the December quarter.

"Still weak profitability and as yet unconfirmed expectations of a strong recovery mean firms are approaching the recovery cautiously."

Hiring had remained negative, despite a modest improvement to -29 per cent in the September quarter from -31 per cent, with firms' intentions for the December quarter for no more job losses.

Firms continued to shed labour for the sixth consecutive quarter in the three months to September, but that was a relatively short period of time compared to 14 consecutive quarters of declines in the 1997/98 recession, NZIER said.

Declining activity and spare capacity had depressed prices, with most firms reporting falling prices for three consecutive quarters.

NZIER principal economist Shamubeel Eaqub said most indicators were headed in a positive direction, albeit from low levels in most cases.

"Firms can see the light at the end of the tunnel and are starting to think about the rebuilding and expansion of their operations, rather than focusing on further cutbacks.

"However, we shouldn't get too carried away. Sales remain weak, and until firms see these picking up again, they are unlikely to take on many more staff or invest heavily. This suggests that the recovery from the recession will be shallow and gradual."

The QSBO found sales remained the biggest constraint on growth, while the number of firms reporting finance as a constraint lifted to 10 per cent from 6 per cent.

"Firms reporting this increase were from a broad variety of industries and regions and it is not clear if it relates to cost or availability of credit," NZIER said.

In the manufacturing sector optimism surged to +37 per cent from -22 per cent, while indicators of experience showed improvement in activity, profits and other key indicators, but were still in negative territory.

"We are wary that exuberant expectations may not be met in the December quarter, similar to the recovery path seen in earlier recessions," NZIER said.

For the building industry output, at -30 per cent from -44 per cent, and new orders, at -37 per cent from -49 per cent, remained "very weak". Confidence surged to +27 per cent from -6 per cent.

Unlike most other sectors, job shedding intensified in the building sector in the September quarter, and the sector still seemed overstaffed with reported productivity still falling, suggesting further job losses were probable if activity did not perk up soon, NZIER said.

- NZPA