Survey reveals economy at full steam

By BRIAN FALLOW

The economy is going like the clappers and running into capacity constraints, according to the Institute of Economic Research's latest quarterly survey of business opinion.

But overall business confidence is more subdued. The institute puts the difference between that and the strong domestic indicators down to concerns about the world economy and the possibility of war in Iraq.

A net 5 per cent of respondent firms expect business conditions to worsen over the next six months, compared with a net 2 per cent in the previous survey.

But that may reflect the winter blues. Seasonally adjusted sentiment improved from a net 8 per cent optimistic in June to a net 18 per cent in September, says the institute.

The survey's measure of domestic trading activity - a good predictor of gross domestic product growth - rose again in the September quarter. June-quarter GDP was 4 per cent higher than in June last year.

The rise in the September domestic trading indicator is consistent with annual growth of 6 per cent by the end of the year.

But the institute says capacity constraints call into question whether the economy will be able to reach that rate. In any case, it expects growth to weaken next year because of the sluggish world economy and weak commodity prices.

The survey's capacity utilisation indicator, a measure of how much spare capacity manufacturers and builders have, is the tightest since 1994. Investment intentions and productivity have also improved. A net 11 per cent of firms say they will hire more staff in the next quarter.

But more firms identified labour as the factor most limiting production than at any time since 1975.

Bank of New Zealand economist Stephen Toplis said the net 9 per cent of firms intending to invest more was consistent with the bank's view that investment in plant and Machinery would rise about 6 per cent this year and 5.5 per cent next year.

"But with capacity utilisation where it is and expected profitability at such high levels too, one might expect a much stronger investment profile that we are now forecasting.

"We suspect that investment is being held back by the huge uncertainty that pervades the world economy at the moment, plus the fact that even if businesses did expand capacity, they would struggle to find the skilled labour force needed to run the plant."

The institute says other findings in the survey suggest inflationary pressures are relatively subdued. Fewer firms reported an increase in costs this quarter, and fewer said they had raised their selling prices.

Institute economists conclude that the Reserve Bank will not lift interest rates until the global economy shows strong signs of revival.