Firms guarded on prospects

Companies' views of their prospects for the coming year remain strong, but not that strong, the National Bank says.

The bank's monthly business outlook survey found 41 per cent of respondent firms expected their own activity to increase and 11 per cent expected it to decline.

Chief economist John McDermott said that net 30 per cent positive result was down marginally from 31 per cent last month but was still strong and consistent with the economy expanding at a rate of about 3 per cent through the year.

However, it was not at the level that could be expected from an economy with some of the best economic indicators in the world.

"Unemployment is the lowest in the OECD, capacity utilisation is at 30-year highs, world commodity prices are near 20-year highs, the Government is running a surplus of 4 per cent of GDP, inflation is within the target band and we have even grown faster than Australia for the past six years."

McDermott said it was a healthy sign that business leaders were not getting overconfident as a result of all that.

"They have been through cycles before. They are increasing capacity but not getting carried away."

Expansions could be killed by overconfidence, such as the "irrational exuberance" of the United States economy in the late 1990s, as much as by the lack of confidence as in New Zealand's own slowdown in 2000.

The survey found a marked drop in firms' export expectations, although a net 20 per cent still expect exports to grow (down from a net 29 per cent in February).

Smaller declines were recorded in hiring intentions, profit expectations and in the outlook for construction.

Two indicators of particular concern to the Reserve Bank deteriorated: a net 27 per cent of firms expect to raise their prices, up from 24 per cent last month, and inflation expectations are now nudging 3 per cent, the top of the Reserve Bank's target band.

However, McDermott said the bank looked like the main candidate for the role of expansion-slayer.