New Zealand businesses are the most optimistic they have been since June 2011 as they look forward to an expected economic recovery, but the economy is going sideways.
However, business expectations have been more optimistic than reality over the past three years, and the latest NZIER quarterly survey of business opinion (QSBO) shows the economy was flat during the March 2012 quarter as capacity pressures eased in areas outside Canterbury.
NZIER principal economist Shamubeel Eaqub said he was still sticking with his expectation the first move up for the Official Cash Rate would be halfway through next year, but put a caveat on that pick, saying it may even be later unless the global economy picked up.
That’s compared with most New Zealand bank economists who are picking, along with the market, a first hike in either December this year or early 2013.
More optimistic, but economy flat
The latest QSBO showed businesses had become more optimistic over the first three months of the year, with NZIER’s business confidence measure rebounding from a net 1% of firms expecting better activity in the year ahead in the December quarter to a net 24% in March.
The measure of firms’ experienced trading activity recovered from -3% to 0% over the quarter, which was consistent with annual economic growth of around 1.8%, Eaqub said.
“The survey shows most indicators are going sideways, suggesting a gradual and patchy economic recovery. The pace of recovery is modest and has not accelerated in the past nine months,” Eaqub said.
“Labour market conditions have stabilised, consistent with slow growth in jobs and wages, although labour shortages remain a concern in Canterbury,” he said.
Performance was patchy across sectors, Eaqub said.
The services sector was recovering gradually, but the pace of growth was historically low. Manufacturing exports were flat, but domestic sales were deteriorating. Retailing slowed a touch – rising inventories and weakening prices suggested demand was subdued. Building activity was slowing – building material weakness was offsetting a lift in construction.
Capacity pressures fall, meaning investment intentions do too
Capacity pressures were largely concentrated in Canterbury, but were easing elsewhere around the country, Eaqub said.
“This is consistent with contained consumer price inflations. Capacity utilisation of manufacturers is elevated, but for builders it has fallen to the lowest level since late 1991,” he said.
“With so much spare capacity it is unsurprising to see a drop off in investment intentions, particularly for plant and machinery. But it contrasts with the high exchange rate which makes imports cheaper. At this stage of the economic cycle, we should be seeing a surge in business investment.
“The absence of this reflects a slow and gradual economic recovery,” Eaqub said.
OCR on hold till mid-2013
The Reserve Bank would be keeping the Official Cash Rate on hold “for some time.” The QSBO showed a lacklustre economic recovery and modest inflation, he said.
The QSBO showed 57% of financial market respondents expected interest rates to rise over the year ahead.
“This is consistent with consensus forecasts of a gradual increase in the OCR from late 2012 or early 2013. NZIER believes the RBNZ will hold interest rates for longer, as the recovery remains shallow and inflation subdued,” Eaqub said.
“Inflation pressures are subdued. Price increases have slowed outside of Canterbury. Retail prices have eased back sharply. This suggests inflation will be modest in the near term. The lack of capacity pressure suggests medium term inflation will be contained,” he said.
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