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Large firms benefit most from indicated economic rebound

Tuesday 11th January 2011

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Large firms are expected to remain the main beneficiaries for the time being of a rebound in the economy identified during the December quarter in a key survey of business sentiment.

Publishing its quarterly survey of business opinion (QSBO) today, the New Zealand Institute of Economic Research (NZIER) said the rebound was patchy, concentrated in large firms and in the upper North Island. Small and medium firms continued to struggle.

Activity fell sharply in Canterbury, reflecting economic disruption after the September earthquake.

NZIER principal economist Shamubeel Eaqub said the economy had avoided a double dip recession, but the recovery remained shallow and slow compared to previous cycles.

Seasonally adjusted business confidence had risen, with a net 3% of firms being optimistic, compared to a net 8 percent of pessimists in the September survey.

Domestic trading activity, which mirrored economic growth, had rebounded with a net -1% of firms reporting an increase in the December quarter, up from -15% in the September quarter, NZIER said.

Gross domestic product fell 0.2% in September quarter after growing just 0.1% in the June quarter.

BNZ head of research Stephen Toplis said the survey showed a significant deviation between the expectations of large businesses, compared to small and medium enterprises.

"The large guys were way more optimistic," he said.

"We think this reflects the fact that large businesses are best placed to capture the benefits of the growth that is occurring.

"They usually have lower rates of leverage; can mount stronger advertising campaigns on a national basis; are better able to capture wholesale sales discounting; have more weight in discussions on rent reviews; have easier access to finance; and have more flexibility with their labour force," Toplis said.

"We believe the squeezing out of small businesses will continue until the expansion is well entrenched."

He also pointed out that while the QSBO showed retail sales rising strongly, anecdotal evidence from the retail sector indicated December had been far from great.

The survey result may reflect the fact survey responses were collected early in December. It was also possible the data may have been affected by relative strength in vehicle sales, or it may be a function of volume growth at the expense of heavy discounting, Toplis said.

Goldman Sachs economist Philip Borkin said improvements noted in the survey were positive, but firms still appeared to have an element of hesitation.

"It is almost the case that something needs to jolt firms into action to start building momentum and turn the recovery into a more robust one. Perhaps the reconstruction of Canterbury and the Rugby World Cup will provide those triggers this year," Borkin said.



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