NZIER QSBO shows solid business confidence with few inflation pressures; room for RBNZ to leave OCR on hold

By Bernard Hickey

The New Zealand Institute of Economic Research (NZIER) has released its December Quarter Survey of Business Opinion (QSBO) showing solid business confidence and few inflationary pressures.

"The New Zealand economy had a Goldilocks finish -- not to hot, not too cold," NZIER said in releasing the survey.

A net 21% of firms expected an improvement in the general business situation in the next quarter, unchanged on a seasonally adjusted basis from the September quarter.

However, the survey showed an improvement in net confidence in actual terms to 23% from 19%. It also showed an improvement in experienced business conditions by firms themselves in the December quarter, led by the retail sector. 

Experienced business conditions, which most closely mirrors GDP growth, were seen to have improved in the December quarter by a net 20% of survey respondents, up from a net 15% in the September quarter.

NZIER Principal Economist Shamubeel Eaqub said the survey was consistent with annual economic growth of around 3.0% to 3.5% in the December and March quarters.

He said that the Reserve Bank was likely to leave the Official Cash Rate on hold through 2015 as cost and price pressures remained subdued despite increasing signs of capacity constraints. Only a net 13% of respondents expected interest rates to rise over the next year, down from 66% in September. 

"Costs, both historical and expected, are at an historically low level," NZIER reported, noting that prices increases eased in the latest quarter and are expected to remain low in the next quarter.

A net 24% of respondents said their costs increased in the December quarter, up only slightly from 23% in the previous quarter. A net 22% expected costs to increase in the next survey, up from 21% in the next quarter.

Only 9% of respondents were able to increase their prices in the December quarter, whereas a net 29% had said in the September quarter they expected to increase their prices in the December quarter. Only a net 13% expected to increase their prices in the March quarter.

Despite that, capacity constraints were deemed to have tightened with the measure of capacity utilisation rising to 91.9% from 90.6% in the previous quarter.

The survey was expanded by 75% in the December quarter to 4,300 chief executives or their nominees in three main sectors -- building, merchants and services. It does not cover the agriculture sector.

Hiring intentions

The strongest result in the survey was around hiring intentions.

A net 17% said they had hired extra workers in the December quarter, up from a net minus 1% who had hired in the September quarter. The result for actual hiring in the quarter was almost exactly the same as the net 18% who said in the September quarter they would hire extra staff in the December quarter.

The survey found a net 21% expected to hire extra staff in the March quarter, up from 18% in the previous quarter.

A net minus 32% said it was easier to find skilled labour, which was worse than the minus 26% in the September quarter.

Reaction

Economists said the survey results reinforced the likelihood that the Reserve Bank would keep interest rates on hold for the foreseeable future.

ANZ Senior Economist Mark Smith described the survey as a solid set of readings, although firming capacity metrics pointed to pending rises in core inflation.

"The overall impression is that the economy continues to display Goldilocks characteristics, consistent with the OCR remaining on hold for a considerable period," Smith said.

"That said, the RBNZ will remain alert to rising capacity pressures, in addition to the resurgent Auckland housing market," he said.

ASB Senior Economist Jane said the survey results were encouraging.

"Particularly encouraging was the strong improvement in labour market conditions, with a strong increase in actual and intended employment," she said.

"There are indications of added capacity pressures, with skill shortages and capacity utilisation increasing.  However, to date, firms appear to be reluctant to lift prices," she said, noting this was weighing on margins and could dampen the economic momentum," she said.

"With inflation pressures likely to pick up, we continue to expect the RBNZ to lift the OCR further at the end of the year.  We expect a 25 basis point increase in the OCR in December 2015 and March 2016, bringing the cash rate to 4%," she said.

(Updated with more details, chart, reaction)