Pulse of optimism still robust

By BRIAN FALLOW economics editor

"I'm still all right Jack, but I worry about the rest of them" was the predominant message from the New Zealand Institute of Economic Research's latest survey of business sentiment.

Confidence in the general business environment fell in the June quarter, but firms remained upbeat about their own activity and prospects.

A net 2 per cent of firms expect a deterioration in general business conditions over the next six months, compared with a net 23 per cent three months ago expecting an improvement.

But the decline was entirely seasonal, the institute said. "After removing the regular seasonal variation, a net 9 per cent expect conditions to improve, compared with a net 3 per cent expecting an improvement in the previous survey."

Firms enjoyed a strong rise in their own trading activity in the June quarter - a net 27 per cent reported an increase compared with 18 per cent in March. That is the strongest rise for 7 1/2 years.

Hiring and investing intentions are also at historically high levels. Hiring intentions are especially strong in the upper North Island, with a net 14 per cent expecting to expand staff numbers compared with 7 per cent three months ago.

"Our reading of the survey is that confidence is relatively neutral about the general business situation in contrast to the own-activity indicators which are very robust," institute economist Doug Steel said.

"Growth in the June and September quarters should be reasonably good, but there is a warning that it will ease back by the end of the year and into next year."

Confidence was strongest in the upper North Island and weakest in the South Island, where firms are more exposed to the agricultural sector, facing the double whammy of a stronger dollar and weaker commodity prices. The quarterly survey of business opinion does not include farmers directly.

The impact of the dollar's rapid appreciation can be seen in the steep drop in manufacturers' confidence, from a net 23 per cent optimistic in March to a net 12 per cent pessimistic in June.

A net 2 per cent of those manufacturers and builders who export expect to raise their prices, down from 14 per cent in the previous survey. By contrast, a net 13 per cent (up from 9 per cent) of their non-exporting peers expect to raise prices.

Confidence is also notably weaker among New Zealand manufacturers than their Australian counterparts, reflecting the fact that the New Zealand dollar has risen about 17 per cent against the United States dollar this year, while the Australian dollar has risen 10 per cent.

Economy-wide, there was a fall in the number of firms expecting to raise their prices over the next three months, a net 25 per cent down from 32 per cent in March.

But that is still above the 17 per cent average through last year.

ANZ Bank chief economist David Drage said the survey showed medium-term inflation pressures had intensified.

Capacity utilisation remains at the historically high level of 90.6 per cent, "yet while investment intentions have improved, the net proportion of firms indicating they intend to increase investment remains considerably lower than in the mid-1990s, the last sustained period of capacity utilisation above 90 per cent."

As long as sales remained robust, firms might increasingly ration production by raising prices, Drage said.

And the number of firms reporting difficulty in finding skilled and unskilled labour has risen, increasing the risk of wage inflation.

"While the risks to the external sector remain, today's survey results suggest the rising dollar has had only a limited impact so far on pricing intentions. It also indicates that domestic demand is, if anything, stronger than it was back in the March quarter," Drage said.

So he thinks the Reserve Bank will raise the official cash rate another 25 basis points to 6 per cent on August 14.

Deutsche Bank has "pencilled in" a 25-point rate hike next month.

But its senior economist, Darren Gibbs, said an August 14 rate hike was now close to a 50:50 call.