Jim Eagles: Plenty of reasons to cheer - softly

New Zealand business appears to be basking in a warm glow of confidence which should bode well for the future.

The Institute of Economic Research's survey of business opinion in the first quarter found that a net 23 per cent of respondents expected things to get even better over the next six months.

An Auckland Chamber of Commerce Survey of 600 of its members in March found record levels of optimism.

Only 8 per cent viewed the future pessimistically.

And why not?

The New Zealand economy has survived the global downturn with barely a stutter.

Initially the economy was powered by high commodity prices and a low dollar.

When export returns started to dip, the domestic economy was poised to take over with employment rising, incomes improving, more immigrants, retail sales booming and the housing market heating up.

Now, with the Reserve Bank starting to tighten the monetary screws, the world economy is recovering and bringing hope of increased demand for exports.

Last month the International Monetary Fund revised its prediction for world growth this year from 2.4 per cent to 2.8 per cent.

No wonder businesses look forward to riding this economic wave for some time to come.

But beneath the surface there are just a few warning signs that the wave might not run as far as the riders hope.

The state of business confidence, while encouraging, is nowhere near as high as in 1999 or 1992-94 when the NZIER survey recorded two or three times the level of optimism.

Perhaps because of that, investment intentions remain disappointingly low, considering the seemingly gung ho climate and the high level of plant utilisation being recorded.

International figures indicate that private sector spending on R&D is still low, representing just 0.3 per cent of GDP compared with an OECD average of 1.3 per cent.

The rural sector, while still healthy, will not be quite the driving force of the past couple of years. Dairy giant Fonterra signalled its view last month when it trimmed about $500 million from its payout forecast for the current financial year, meaning the rural economy is likely to get $1 billion less than the previous season.

The New Zealand dollar has soared a bit higher than predicted and the Acting Governor of the Reserve Bank has taken an even more hawkish attitude to interest rates than was generally expected.

That suggests that the general mood of the business community is, sensibly, one of cautious optimism.

There are high hopes that the present good times will keep plants operating at capacity, but confidence has not reached the point where firms are ready to commit themselves to make big investments in the future.

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