Rest of the nation struggling too

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The New Zealand Institute of Economic Research's quarterly survey of business opinion depicts an economy which, even outside quake-stricken Canterbury, is still struggling to grow for want of demand.

The headline measure of confidence about the general business situation fell from a net 8 per cent positive in the December survey to a net 27 per cent pessimistic.

The institute's preferred measure, which is seasonally adjusted, posted a less dramatic decline, from a net 1 per cent negative to a net 11 per cent.

Domestic trading activity, which reflects firms' own experience over the past three months and is a more reliable indicator of gross domestic product, fell to a net 5 per cent negative from a net 1 per cent negative in December. Outside of Canterbury the decline was to a net 2 per cent negative from a net 4 per cent positive in December. Firms' expectations of their own immediate outlook also declined.

These indicators are consistent with a flat economy over the first half of 2011, NZIER principal economist Shamubeel Eaqub said.

In Canterbury the activity indicators suggested a decline of 5 to 10 per cent in GDP, he said.

The survey's responses came in between March 13 and 23, after the Reserve Bank cut the official cash rate from 3 to 2.5 per cent.

"The Reserve Bank was very clear that the cut was for confidence reasons," Eaqub said.

"Perhaps it has worked. Confidence has fallen, but not to a scary level."

However the survey gives scant evidence of recovery.

With rare exceptions, like manufacturers' exports, the indicators are below their long-term averages at a time when recovery would imply above-trend readings.

Retailers had been relatively upbeat in the December survey with both reported and expected sales well above preceding quarters (though still below trend). In the latest survey both measures have plunged.

Lack of demand remains the most important of the factors firms cite as preventing an increase in output.

Costs have risen and are expected to keep doing so, but the proportion of firms expecting to raise their own prices has fallen from a net 22 per cent to a net 14 per cent.

That squeeze on margins has reduced both reported and expected profitability, and represents an inflationary threat down the track when demand picks up to the point where cost rises can be passed on, Eaqub said.

Investment intentions have stabilised. "At this stage they should be investing a lot more for future increases in production. Instead they want to see existing capacity mopped up," Eaqub said.

BNZ economist Stephen Toplis said the drop in pricing intentions, from a net 22 per cent expecting to raise prices in December to an 18-month low of a net 14 per cent in the latest survey, was consistent with inflation falling rapidly to around 2 per cent.

"We think the Reserve Bank will be overjoyed by these data and on balance the figures are certainly consistent with there being no need to raise rates any time soon."

A net 2 per cent of firms reported an increase in staff numbers, when a net 3 per cent had reported a decline in the previous survey, and firms reported it is getting less easy to find skilled workers. Hiring intentions eased, however, mainly in Canterbury.

Manufacturing was the best-performing sector - the survey does not include agriculture.

Builders, by contrast, recorded a steep drop in expected activity, from a net 20 per cent expecting an increase in the December survey to a net 8 per cent expecting less work in the latest one.