NZ economy improved in June qtr, but Aussie slowdown, deleveraging and high NZ$ remain risks to growth, NZIER says

Economic activity in New Zealand improved during the June quarter but is at risk from a slowdown in the Australian economy, continued deleveraging by households and a high New Zealand dollar, the New Zealand Institute of Economic Research (NZIER) says.

Short-term inflation pressures remained soft as firms struggled to raise prices due to subdued demand for goods and services, meaning the Reserve Bank of New Zealand would be able to hold the Official Cash Rate at its record low of 2.5% until early 2012. Medium-term inflation pressures would start to show through due to rebuilding work in Canterbury next year, and as wages began to rise again, NZIER said.

In the NZIER's June Quarterly Survey of Business Opinion (QSBO) released this morning, chief exectuive Jean-Pierre de Raad said economic activity improved in the June 2011 quarter, after softening following the February Canterbury earthquake.

NZIER's comments come after Treasury yesterday forecast GDP growth of 0.3% in the March quarter from December, ahead of Statistics New Zealand GDP figures to be released on Thursday. A Reuters survey of economists pointed to GDP growth of 0.4% in the March quarter. Yesterday, Treasury said early signs showed the recovery was firming in the current June quarter.

"Economic conditions reflect modest growth. Business confidence bounced back after the Canterbury earthquake, but there continue to be signs of economic weakness," de Raad said.

Hiring and overtime worked fell in June, while business expectations and intentions for growth and hiring improved looking to the September quarter.

"But we are yet to see the catalyst that transforms this confidence into hiring and investment," de Raad said.

"Local demand has strengthened while exports have stabilised, but demand is still the biggest constraint on businesses and margins are tight," he said.

"Continued deleveraging, slowing activity in Australia and a high exchange rate provide headwinds for economic growth."

'Business confidence soars as Canty returns'

Business confidence had soared in the June quarter. On a seasonally adjusted basis, a net 31% of firms surveyed were optimistic, compared to net 11% pessimists in the NZIER's March survey. The recovery in confidence came after activity began to recover in Canterbury.

manufacturers were being supported by domestic sales, but activity was threatened by a slowdown in the Australian economy - New Zealand's largest trading partner - and a slowdown in demand for exports.

'Labour becoming harder to find'

Economy-wide labour market indicators deteriorated in June, but the outlook for the medium term was improving.

"There were declines in past hiring (-6% from +2%) and overtime worked (-4% from 0%). But hiring intentions have rebounded (+7% from -4%), mainly due to a sharp increase in Canterbury," de Raad said.

"Despite soft hiring, labour is slowly becoming more difficult to find. This suggests wage inflation will pick up gradually over the next two years," he said.

'Short-term inflation subdued'

Firms were struggling to raise prices amidst a subdued demand environment.

"Margins remain tight and and lack of demand is the key constraint on passing on costs. Cost pressures eased in June," de Raad said.

"However firms are finding that labour is becoming increasingly more difficult to find. This and the Canterbury reconstruction point to medium-term inflationary pressures," he said.

"Current soft inflation and modest economic growth mean the RBNZ can hold the OCR at 2.5% until early 2012 before reassessing the need to raise interest rates."