Survey points to slower growth

By BRIAN FALLOW economics editor

Weaker growth but higher inflation are in the offing, according to the Institute of Economic Research's latest quarterly survey of business opinion.

Headline confidence plunged; a net 29 per cent of the 688 firms responding expect general business conditions to deteriorate over the next six months, compared with a net 2 per cent pessimistic three months ago.

In the interim, interest rates have risen (hitting builders' sentiment), the exchange rate has been volatile (deepening exporters' gloom) and a squeeze in margins has dented confidence among retailers and manufacturers, the institute says.

But headline business confidence is volatile. A much better pointer to the outlook for economic growth a year from now is provided by domestic trading activity expectations - which reflect the outlook of individual firms.

This indicator is pointing to a slowdown in economic growth to around 2.3 per cent a year from now, down from 3.5 per cent last year.

Easing growth has not yet slackened the pressure on the economy's resources, however. On the contrary, capacity utilisation is the highest it has been since 1973, and the proportion of firms citing labour as the single factor most limiting their ability to increase output is the highest since 1974.

Overall capacity utilisation has been pushed up by the building sector - no surprise there - but it is also the highest it has been since 1980 among exporting manufacturers.

That was surprising given the recent strength of the dollar, institute economist Doug Steel said.

It might reflect strong world demand or it might be a short-term response to lower prices - firms pushing up volumes to compensate.

Investment intentions are above their long-term average level.

The degree of difficulty firms have in finding skilled staff is off a little from three months ago but still very high.

"These indicators suggest wage growth of around 3 per cent is not quite enough, given the tightness of the labour market," Steel said.

As would be expected with resources so stretched, inflation warning signs are flashing. A net 16 per cent of firms raised their prices in the past three months and a net 24 per cent intend to raise them in the next three months.

A net 26 per cent reported higher costs in the past three months and a net 28 per cent expect their costs to mount in the next three months.

The institute said these and other indicators point to inflation rising from 1.6 per cent last year to around 2.5 per cent this year. That would be in line with Reserve Bank expectations.


Business confidence was lower in all regions. The fall was steepest in the flood-stricken lower North Island.

Confidence was lower across all sectors.

Among manufacturers, a net 10 per cent reported higher output this quarter, compared with 30 per cent last time. Cost increases are more widespread than in the December survey but whereas a net 18 per cent of manufacturers expect higher costs only a net 6 per cent expect to raise their prices. Profitability expectations are accordingly lower.

Builders have crossed the line from optimism to pessimism over the past three months. Their output remains strong by historical standards but it eased in the past quarter and is expected to fall further over the next three months.

More firms reported cost increases than in the previous quarter and more firms intend to raise their prices in the next three months.

Merchants reported slower sales growth in the March quarter and a further decline is expected over the next three months.

And while merchants' costs are rising, fewer firms intend to raise prices. Instead, profitability will suffer.