Business confidence soars in latest survey

A key measure of business sentiment surged in March, but economic recovery is moving at a slower pace.

The New Zealand Institute of Economic Research's (NZIER) Quarterly Survey of Business Opinion recorded a net 36 per cent of firms expecting conditions to improve over the next six months, on a seasonally adjusted basis. That compared to 23 per cent in the December quarter.

There was a growing sense of realism around expectations of the recovery, NZIER principal economist Shamubeel Eaqub said today.

"To date the recovery has been more gradual than firms expected. New hiring has been slow to pick up, despite positive intentions," Eaqub said.

"A shallow recovery is in place, but the outlook is still fragile."

Capacity utilisation nudged down in the March quarter to 90.5 per cent from 91.1 per cent. That measure had been volatile recently, due to large inventory adjustment in the primary sector.

A net -5 per cent of firms experienced a seasonally adjusted rise in domestic trading activity in the past quarter, an improvement from -10 per cent in the December quarter. A net 20 per cent expected a rise in the next quarter, up from 10 per cent in December.

"The shallow pace of the recovery continues to surprise against high expectations, but the gap is starting to close," NZIER said.

Philip Borkin, economist at Goldman Sachs JBWere said there were few surprises from today's QSBO, which "although continues to highlight an economy on the path to recovery, also suggests it is a gradual one by historical standards."

Borkin said business expectations were still failing to meet reality.

"For the past three quarters, firms' experienced activity has fallen short of their previous quarter's expectations. This is also evident across a number of other gauges within the survey," he said.

The survey showed there was still "reasonable slack" in the labour market, with firms reported it "less" easy to find both skilled an unskilled labour, but only marginally.

"At first blush, there appears to be few surprises within today's results. The economy is recovering, there remains spare (but reducing) capacity within the economy, but also a dynamic of expectations failing to meet previous lofty expectations," said Borkin.

ASB economist Christina Leung said the improvement in confidence was encouraging, and indicated the economic recovery remained on track.

Despite a small decline in business trading and profitability, businesses were confident enough to plan for an expansion of operations, she said.

ANZ senior markets economist Khoon Goh said while there were some positives to take from the survey, the recovery had not yet reached a "self-sustaining stage" .

Goh said improved confidence was being driving by larger firms, with many small to medium sized businesses still finding conditions tough.

A net -15 per cent of firms experienced a rise in employment, a little better than the -18 per cent in the December quarter. Firms expecting a rise in employment in the next quarter edged up to a net 2 per cent from 1 per cent last quarter.

While hiring intentions were marginally positive in recent quarters, that had not translated into actual hiring yet, NZIER said.

"The recovery in new hiring may be delayed by reduced labour turnover and ability of firms to increase overtime in the first instance."

NZIER reported signs of renewed weakness in profitability expectations for regional firms, but a more optimistic outlook from firms spread across the country.

Manufacturer optimism eased in the March quarter, to 24 per cent from 33 per cent, with declining domestic sales hurting the manufacturing sector, while export sales proved resilient.

Optimism in the building sector slipped to 27 per cent from 34 per cent, but new orders finally turned positive, to 10 per cent from 0 per cent. Output in the building industry grew marginally in the March quarter to 1 per cent from 0 per cent.

Construction firms generally remained weak, while building materials firms were improving, NZIER said.

- NZPA / NZ HERALD