Recovery slower than expected as firms wait for reality to catch expectations: NZIER (Update 1)

New Zealand's economic recovery to date has been slower than businesses expected, with firms holding off from acting on earlier intentions, the New Zealand Institute of Economic Research (NZIER) said. (Update 1 adds ASB economist comments.) The NZIER's latest Quarterly Survey of Business Opinion (QSBO), which is watched closely by the Reserve Bank, showed business confidence stabilised in the December quarter from September. However, businesses were still "waiting for reality to catch up with expectations," economist Shamubeel Eaqub said. "For example, actual hiring is lagging behind hiring intentions and merchants aren't restocking their shelves despite anticipating a surge in sales. Until firms act on their expectations, the recovery will be shallow and gradual," Eaqub said. "Overall, the QSBO suggests that interest rates will need to be lifted around mid 2010 as the Reserve Bank recently indicated. However, a still shallow economic recovery and still weak labour market suggest little urgency to raise interest rates sooner," he said. Headline confidence stabilised in the December quarter at net 23% of firms expecting conditions to get better in the next six months, from net 22% in September. ASB Chief Economist Nick Tuffley said the survey results were broadly consistent with GDP growth of 0.5-0.6% in the December 2009 quarter (full Tuffley comments below). That would follow growth of 0.2% in each of the September and June quarters, when the economy emerged from a recession that began in the first quarter of 2008. Here are the NZIER's comments on the December survey:

QSBO shows recovery slower than firms hoped NZIER's Quarterly Survey of Business Opinion (QSBO) shows that business confidence stabilised in the December 2009 quarter. A net 23% of firms now expect conditions to improve over the next six months, compared to 22% in the September quarter. "Firms are optimistic about the economic outlook and their recent performance has been improving gradually. But the recovery to date has been slower than firms initially expected. The flat-lining of confidence is consistent with businesses remaining optimistic, but waiting for reality to catch up with expectations," said Shamubeel Eaqub, Principal Economist at NZIER. "For example, actual hiring is lagging behind hiring intentions and merchants aren't restocking their shelves despite anticipating a surge in sales. Until firms act on their expectations, the recovery will be shallow and gradual." Mixed signals for Reserve Bank: reduced spare capacity, but a weak labour market Spare capacity has reduced as activity picks up. The capacity utilisation of manufacturers and builders rose sharply in the December quarter (91.1% from 88.4%). The increase was evident across most firms, suggesting limited spare capacity when the recovery takes hold. This may create some inflationary pressure. However, capacity utilisation has been volatile in recent quarters, particularly in the primary sector, so we caution against reading too much into this result. The labour market remains weak, but hiring intentions have turned marginally positive and job-shedding has slowed. Wage growth is likely to be subdued for some time yet. "Overall, the QSBO suggests that interest rates will need to be lifted around mid 2010 as the Reserve Bank recently indicated. However, a still shallow economic recovery and still weak labour market suggest little urgency to raise interest rates sooner." Eaqub said. Profitability improves Profitability is improving, as costs have fallen more rapidly than selling prices. Manufacturers led the way in profitability with the highest turnaround on record. The outlook is improving with only a net 2% of firms expecting profits to decline in the March 2010 quarter. Investment intentions are lifting in sync with improving sales and profitability. "We are interpreting the QSBO results as cautiously optimistic. The economy is recovering, albeit at a slower pace than firms expected earlier", said Shamubeel Eaqub.

The survey suggests the economic recovery gained some momentum towards the end of 2009 after very weak growth in 2009Q2 and Q3. Nevertheless, the indications are that activity is still pretty weak, and any noticeable improvement largely confined to manufacturing and building. The results are in line with our expectations that the recovery has entered into a gradual acceleration of growth rates rather than an explosive rebound. The RBNZ forecast 0.6% growth for 2009Q4 (our forecast is 0.5%), and the survey results look broadly consistent with those outcomes. The inflation-related results do show signs of upward momentum returning. In particular, capacity utilisation has jumped sharply to a level not seen since 2008Q2 when the recession had barely begun. Expectations of higher costs and selling prices are now creeping up, presumably as businesses attempt to shore up crushed margins. Labour market indicators still point to a degree of slack, but it is clear that is starting to wane as well. The recession, despite being deep, did not generate as much disinflationary pressure as would have been expected. The caution coming out of the slowdown is that inflation could start to pick up comparatively soon. We continue to expect that the RBNZ will start to lift the OCR from its very low level in April.