Two-speed economy as dollar knocks confidence

By BRIAN FALLOW

The rampant kiwi dollar has begun to weigh on business confidence, despite evidence the economy is at full stretch.

Consistent with other indicators of a two-speed economy - a buoyant domestic sector but a subdued external one - the New Zealand Institute of Economic Research's December quarterly survey of business opinion found manufacturers much more pessimistic than service industry firms, merchants or builders.

Among manufacturers, those who export are significantly more negative about the outlook than those who do not, a net 28 per cent expecting worse times compared with a net 8 per cent of non-exporters.

Last Friday's inflation data told a similar story. Inflation is more evident in services than in goods, and in sectors not exposed to international competition or the exchange rate.

In the quarterly survey of business opinion a net 3 per cent of respondents expect the general business situation to improve over the next six months compared with a net 5 per cent expecting a deterioration in September.

However, when allowance is made for a Christmas cheer effect in December surveys, and will-this-winter-ever-end negativity in September quarters, the seasonally adjusted confidence measure declined to a net 4 per cent pessimistic, from a net 15 per cent optimistic three months ago.

The major factor in the deterioration has probably been the higher dollar, which makes exports less competitive and less profitable, the institute said. Between the September and December surveys the New Zealand dollar gained 10 per cent against the US dollar and 6.5 per cent against the Australian.

Growing evidence that the Australian economy is slowing also appears to have dented exporters' optimism.

However, Consensus Economics' January survey of international forecasters found growth among New Zealand's top 14 trading partners is expected to be 2.7 per cent this year, marginally better than last year, and to improve further to a normal 3.4 per cent in 2004.

Domestic trading activity remained robust in the December quarter but fewer firms reported gains in domestic sales suggesting that growth is beginning to ease. Indeed manufacturers, builders and merchants all expected growth in New Zealand sales to slow.

But the slowdown will be from a gallop to a canter.

Institute economist Peter Gardiner said activity indicators were consistent with expectations that economic growth would decline to around 2.5 per cent over the year.

Other indicators in the survey show the economy's resources stretched tight. Capacity utilisation among manufacturers and builders is the highest it has been since March 1974, and the difficulty of finding skilled labour is at the same levels as the boom years of the mid-1990s.

But the survey gives grounds for confidence that businesses' response is the desirable one - more investment - rather than raising prices.

Investment intentions have improved, despite the subdued level of overall confidence, and hiring intentions remain robust.

ANZ, which tracks job advertisements, yesterday reported a rise in November. Job ad levels are running around 30,000 which was consistent with both further employment growth and a possible decline in the unemployment rate from the current 5.4 per cent, ANZ chief economist David Drage said.

The institute says despite evidence of capacity constraints, its survey suggests pressure on prices is abating and inflation will edge down closer to 2 per cent over the next nine months.

There is little international inflation to import and in any case the appreciating exchange rate makes imports cheaper.

The net proportion of firms reporting increased costs continues to decline, as is the proportion expecting to raise prices. A net 10 per cent expect to raise prices, the lowest level for three and a-half years.

Coupled with the prospect of slower economic growth, this suggested there would be little need for the Reserve Bank to adjust monetary policy over the next six months, institute economist Phil Briggs said.