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NZ firms stay upbeat in December on building boom, rural recovery

Tuesday 17th January 2017

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New Zealand businesses stayed relatively upbeat about the state of the economy in the final three months of 2016, as the nation's building boom continued to soak up resources and the recovery in global dairy prices lifted optimism in rural areas. 

A seasonally adjusted net 26 percent of firms surveyed in the New Zealand Institute of Economic Research's quarterly survey of business opinion expect general business conditions to improve in the coming 12 months, down from 28 percent in the September period. A net 21 percent experienced stronger trading in the final three months of 2016 and 25 percent see more expansion in the coming quarter, down from 26 percent and 32 percent respectively. 

Business confidence remained strongest in the building sector, with the house building programme in Auckland and Canterbury's reconstruction continuing to underpin activity. While the survey of 906 firms doesn't specifically cover agriculture, firms in rural areas perked up with the dairy price recovery through the second half of last year, with a net 32 percent of South Island firms and a net 30 percent of lower North Island companies upbeat about the economic outlook, compared with 25 percent and 19 percent respectively in September.

"Business confidence remains highest in the building sector, reflecting very strong construction demand," NZIER principal economist Christina Leung said in her report. "Confidence in rural regions is bouncing back as global dairy prices continue to recover." 

ASB Bank economists expect New Zealand's economy will grow 3.5 percent this year on the strength of the building sector and tourism boom, which were key planks in robust growth last year. 

Leung said the momentum in the economy continues to point to annual gross domestic product growth this year of more than 3 percent, and that there was an increase in inflation pressures emerging with firms "able to follow through with pricing intentions" in the December quarter. 

A net 20 percent of businesses increased prices in the December period, turning around from a net 4 percent having to cut prices in the prior period. That matched expectations in the September quarter and a net 22 percent expect to raise prices. Cost pressures remained, with a net 20 percent experiencing higher costs and a net 18 percent expecting higher costs to come. 

Profitability expectations were scaled back, with a net 10 percent expecting higher profit, down from 20 percent in September. Experienced profit was flat, compared to a net 1 percent decline in September. 

NZIER expects the Reserve Bank will keep the official cash rate unchanged until mid-2018, though Leung said the risk is for an earlier hike than later. A net 55 percent of firms surveyed see interest rates rising over the coming year, turning around from a net 37 percent seeing a fall in September. 

Businesses took on more staff in the quarter, with a net 14 percent increasing headcount compared to 4 percent in September, though that's set to slow with a net 17 percent intending to hire new workers, down from 27 percent. Skilled labour got easier to find, at -36 percent, compared to -41 percent in September, while unskilled labour got harder, with a net -19 percent compared to -14 percent. 

Capacity utilisation increased to 92.7 percent from 92.5 percent, and a net 20.4 percent of firms reported capacity as a constraint compared to 16.8 percent in September. 

Investment intentions improved, with a net 11 percent intending to invest in buildings compared to 9 percent, while a net 16 percent intend to invest in plant and machinery compared to 17 percent. 

The November earthquake in Kaikoura, which disrupted businesses in the upper South Island and lower North Island, didn't have a noticeable impact on business confidence, which remained high in the capital city of Wellington. 

Manufacturers were more upbeat in the quarter and experienced more production with a net 31 percent increasing output compared to 16 percent in September as a weaker New Zealand dollar stoked demand for Kiwi exports. Experienced exports jumped to a net 20 percent from 6 percent in September.

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