Sweet spot feels good to business

Businesses are enjoying an economic "sweet spot", the National Bank survey of business confidence shows.

The bank's chief economist, John McDermott, said: "It shows the economy in a sweet spot with good growth being recorded, the prospect that it will continue and we haven't got any material evidence that inflation will break out its target range."

A net 31 per cent of firms expect their own activity to increase over the coming year, up from 27 per cent in the previous survey, done in December.

The bank said that was consistent with the economy growing at an annual pace of about 3 per cent.

By contrast, firms' view of the general business environment over the year ahead slipped.

A net 13 per cent expect it to get worse compared with a net 8 per cent pessimism in December.

Export expectations improved despite the high dollar.

A sharp increase in capacity use was reported, profit expectations and investment intentions remained steady and hiring intentions rose.

McDermott said it was good news that firms were not just reporting capacity constraints but intended to do something about it.

They were not being deterred by worries about future demand or the exchange rate.

But the proportion of firms intending to raise prices increased and expectations of price rises are creeping up.

"That will certainly get the attention of the Reserve Bank, because keeping official interest rates where they are is predicated on keeping inflation expectations anchored," McDermott said.

"It is at this point a small move, but repeated moves in this direction would be enough to change its mind. That result would have been an unwelcome signal for the bank.

"If the Reserve Bank wanted to see things slow down to stop it moving rates higher, it will not see that.

"If it is of a mind that it has done enough with interest rates and what would tip them over was things picking up again, it won't see that either. This is a steady-as-she-goes survey."

The economic expansion was now in its seventh year and had already surpassed in duration and strength the expansion phase of the 1990s, McDermott said.

"High commodity prices, a strong labour market and an increased propensity to invest in physical and human capital point to a continuation of the golden days."

But as the tortoise taught the hare, it was the ability to keep going that produced winners.

Two areas of the economy looked"hare-y" - the housing market and the labour market.

"But the excesses of the housing market, while still a concern, should abate over the course of the year," he said.

House sales had resumed their downward trend in January after a jump late last year fuelled by the mortgage deals on offer.

Fears of a wage-price spiral were misplaced.

"Businesses are intensifying their effort to acquire workers," McDermott said.

"But while there are strong pressures in the labour market, wage claims and inflation expectations (of 2.9 per cent) are still consistent with the inflation target of 1 to 3 per cent."

Happy days

* Businesses remain confident about their own outlook - a sign of continued strength in the economy.
* Investment and hiring intentions are holding up.
* But plans to raise prices are creeping higher, which will worry the Reserve Bank.