KEY POINTS:
Business confidence soared to a four-year high in December, reflecting falling oil prices, interest rates on hold and a dash of seasonal Christmas cheer.
The Institute of Economic Research's Quarterly Survey of Business Opinion is consistent with an economy recovering from a soft landing, but still marked by inflation-threatening constraints.
Manufacturers and builders report little spare capacity, though more than three months ago, while the labour market has tightened.
For the first time since 2002 more of the firms responding to the survey expect the general business situation to improve over the next six months than to deteriorate. A net 3 per cent are optimistic compared with the net 19 per cent in the September survey who expected worse times.
Adjusted for the normal seasonal fillip, a net 5 per cent are pessimistic but that compares with a net 24 per cent in the previous survey and a net 70 per cent a year ago.
The improvement was across all sectors and regions.
What firms say about their own activity and outlook - more reliable indicators of how the economy is doing - also strengthened. A net 10 per cent reported an increase in their trading activity, or 5 per cent seasonally adjusted, compared with a flat reading in September. They expect further gains over the next three months.
Expectations of profitability also improved. A net 12 per cent of firms expect profits to fall compared with a net 27 per cent in September expecting a fall. The outlook three months ahead is a return to profits, though only just.
Investment intentions have climbed, with a net 13 per cent of firms expecting to lift spending on plant and machinery, up from 2 per cent in September and the highest level since 1995.
The institute's director, Brent Layton, put the increase in investment intentions down to a strong dollar, capacity utilisation levels at historically high levels, and the difficulty firms report in finding labour.
First NZ Capital economist Jason Wong said the jump in investment intentions was "a great result, considering one of the drags on growth last year was very weak business investment, which went some way towards explaining why capacity utilisation remained high despite a sluggish economy".
Comfort and concern for Reserve Bank
While the Reserve Bank would take comfort from investment expanding the economy's productive base, economists said it would be concerned by the survey's evidence of a strengthening labour market at a time when it was looking for consumer spending and the housing market to slow.
A net 10 per cent of businesses increased staff numbers where a net 3 per cent had reduced them in the previous quarter. A net 14 per cent expect to be hiring in the next three months. Employers say it is getting harder to find skilled labour (a net 29 per cent compared with 21 per cent in September). The number of firms citing labour as the main factor inhibiting them from increasing output has risen (from 14 to 19 per cent).
"If the labour market rebounds the household sector will continue to feel bullet-proof," said Goldman Sachs JB Were economist Shamubeel Eaqub. While that may be a cloud on the medium-term horizon for the central bank, the survey's short-term inflation indicators were better, or at least no worse.
Fewer firms reported cost increases (a net 40 per cent down from 54 per cent three months ago) and fewer increased their own prices (a net 21 per cent against 32 per cent last time). "This suggests firms are taking the opportunity to ease some pressures on their margins by not lowering prices, despite falls in their input costs," said ANZ National Bank chief economist Cameron Bagrie.
Even manufacturers - the most pessimistic sector - reported improving conditions. A net 7 per cent lifted output over the quarter, where a net 5 per cent had reported a decline in September.
While that mainly reflected higher sales in New Zealand, the institute said, a net 2 per cent still reported higher export sales despite the high exchange rate.
Eftpos maker finds good reasons to be bullish
Like many other businesspeople, Ian Bailey is bullish about the coming year.
"The general view that the market will be coming off has been around for a while, but there hasn't been a downturn yet," says Bailey, managing director of Eftpos terminal manufacturer and exporter Cadmus.
Because the country is between elections, the political environment seems "more certain", Bailey says.
Bailey predicted that for the coming year a lack of skilled labour will be the company's biggest difficulty, but a recent recruitment drive for senior executives had netted a good response from overseas.
However, finding experienced engineering staff would be as "tough" as last year.
"The people we're looking for just aren't [in New Zealand]."
Bailey's "quite bullish" attitude about the company's prospects for the coming year was due to good demand.
Cadmus, which exports mainly to Australia and Singapore, will this year upgrade 50,000 Eftpos terminals in New Zealand, and 400,000 in Australia.
It would also develop opportunities in the Middle East.
Cadmus had "cash in the bank" and "a good ongoing cashflow" so hadn't been hurt by rising interest rates, Bailey said.
But rates did have an impact on customers' willingness and ability to spend.
"The political situation and the monetary policy are pretty stable. Maybe the housing boom is about to come off a bit although they've been saying that for the past three years."
Cadmus mostly buys and sells in US dollars and suffered very little from the volatile New Zealand dollar.
However, with a small element of local manufacturing the company incurred local labour costs.
"Finding the right people at the right prices is always an issue when you're competing against organisations that manufacture in Asia."
The labour cost differences could be between 20 per cent to 30 per cent, he said.
- Christine Nikiel
