NZ firms stay upbeat in December on building boom, rural recovery

New Zealand businesses stayed relatively upbeat about the state of the economy in the final three months of 2016. Photo / Brett Phibbs

New Zealand businesses stayed relatively upbeat about the state of the economy in the final three months of 2016, as the nation's building boom continued to soak up resources and the recovery in global dairy prices lifted optimism in rural areas.

A seasonally adjusted net 26 per cent of firms surveyed in the New Zealand Institute of Economic Research's quarterly survey of business opinion expect general business conditions to improve in the coming 12 months, down from 28 per cent in the September period. A net 21 per cent experienced stronger trading in the final three months of 2016 and 25 per cent see more expansion in the coming quarter, down from 26 per cent and 32 per cent respectively.

Business confidence remained strongest in the building sector, with the house building programme in Auckland and Canterbury's reconstruction continuing to underpin activity. While the survey of 906 firms doesn't specifically cover agriculture, firms in rural areas perked up with the dairy price recovery through the second half of last year, with a net 32 per cent of South Island firms and a net 30 per cent of lower North Island companies upbeat about the economic outlook, compared with 25 per cent and 19 per cent respectively in September.

"Business confidence remains highest in the building sector, reflecting very strong construction demand," NZIER principal economist Christina Leung said in her report. "Confidence in rural regions is bouncing back as global dairy prices continue to recover."

ASB Bank economists expect New Zealand's economy will grow 3.5 per cent this year on the strength of the building sector and tourism boom, which were key planks in robust growth last year.

Leung said the momentum in the economy continues to point to annual gross domestic product growth this year of more than 3 per cent, and that there was an increase in inflation pressures emerging with firms "able to follow through with pricing intentions" in the December quarter.

A net 20 per cent of businesses increased prices in the December period, turning around from a net 4 per cent having to cut prices in the prior period. That matched expectations in the September quarter and a net 22 per cent expect to raise prices. Cost pressures remained, with a net 20 per cent experiencing higher costs and a net 18 per cent expecting higher costs to come.

Profitability expectations were scaled back, with a net 10 percent expecting higher profit, down from 20 per cent in September. Experienced profit was flat, compared to a net 1 per cent decline in September.

NZIER expects the Reserve Bank will keep the official cash rate unchanged until mid-2018, though Leung said the risk is for an earlier hike than later. A net 55 per cent of firms surveyed see interest rates rising over the coming year, turning around from a net 37 per cent seeing a fall in September.

Businesses took on more staff in the quarter, with a net 14 per cent increasing headcount compared to 4 per cent in September, though that's set to slow with a net 17 per cent intending to hire new workers, down from 27 per cent. Skilled labour got easier to find, at -36 per cent, compared to -41 per cent in September, while unskilled labour got harder, with a net -19 per cent compared to -14 per cent.

Capacity utilisation increased to 92.7 per cent from 92.5 per cent, and a net 20.4 per cent of firms reported capacity as a constraint compared to 16.8 per cent in September.

Investment intentions improved, with a net 11 per cent intending to invest in buildings compared to 9 per cent, while a net 16 per cent intend to invest in plant and machinery compared to 17 per cent.

The November earthquake in Kaikoura, which disrupted businesses in the upper South Island and lower North Island, didn't have a noticeable impact on business confidence, which remained high in the capital city of Wellington.

Manufacturers were more upbeat in the quarter and experienced more production with a net 31 per cent increasing output compared to 16 per cent in September as a weaker New Zealand dollar stoked demand for Kiwi exports. Experienced exports jumped to a net 20 per cent from 6 per cent in September.