NZIER: Confidence in building sector drops, less pressure to lift interest rates

NZIER survey shows business confidence steady despite weakness in building sector. Photo / Mark Mitchell

Despite signs of a solid pipeline of construction activity, business confidence in the building sector dropped from 31 per cent to 18 per cent in June, according to the latest NZIER Quarterly Survey of Business Opinion.

It was the second weakest industry sector in the confidence survey, which is considered influential to the Reserve Bank's thinking on interest rates.

Overall business confidence remained steady in the June quarter. A net 18 per cent of businesses expect better economic conditions over the coming months.

There was a slight softening in firms' demand in their own business, with the proportion of businesses experiencing improved demand easing from 20 per cent to 18 per cent in June. Expectations for the next quarter also softened, with a net 23 per cent expecting stronger demand ahead.

Activity and positive sentiment continue to broaden beyond Auckland, with Waikato, Bay of Plenty, Wellington, Gisborne and Southland experiencing the highest levels of business confidence, NZIER senior economist Christina Leung said.

Confidence is now highest in the services sector, despite the easing in demand growth in the past quarter, and expectations of further slowing in the next quarter.

A combination softer sales growth and weak profitability weighed on retail with confidence falling from 15 per cent to 11 per cent.

Although cost pressures have intensified, pricing power is still relatively limited, Leung said.

Businesses remained optimistic about planning for expansion. However, with labour shortages still very acute, there were signs more businesses were looking to invest in plant and machinery in order to increase output, she said.

Capacity pressures and pricing intentions eased in the June quarter.

Capacity utilisation in the building sector eased from a record 94.6 per cent to 93.8 per cent in June, likely reflecting the effects of softer construction activity earlier this year, Leung said.

"Although we continue to expect that underlying inflation will lift over the next two years, these recent developments add to the case that there is little urgency for the Reserve Bank to begin lifting interest rates," she said.

"We continue to expect the Reserve Bank will hold off lifting the Official Cash Rate until the middle of next year."