"One crutch" recovery relies on Canterbury: NZIER

Tuesday 4th October 2011 1 Comment

The building industry is bouncing back for the first time in three years, driven only by the Canterbury rebuild, and retailers are expecting a bumper end to the year.

But the economy is still flat-lining as far as most businesses are concerned, according to the latest New Zealand Institute of Economic Research Quarterly Survey of Business Opinion.

The September survey predated the Reserve Bank’s most recent bearish comments about the global outlook and the two credit rating downgrades announced last week. It shows a net 13% of firms are positive about the general business situation, compared with a net 31% positive in the June survey.

“There was nothing in it that was scary,” said principal economist Shamubeel Eaqub, but he urged caution interpreting business’s expectations, given the clouds gathering over the world economy and the prospects of a second global financial crisis.

“It’s encouraging in a sense that things aren’t getting worse, but we’re seeing a steady state, a holding pattern,” he said. ”The focus should be on experience of firms in the survey, rather than their expectations.”

The building sector showed its first increase in prices in three years, but it was mainly concentrated in Canterbury, with the rest of New Zealand “easing off a touch.”

“We’re recovering on one crutch, which is Canterbury,” said Eaqub.

Canterbury sentiment was “optimistic but volatile”, with businesses uncertain about the timing and momentum of the Christchurch rebuild and evidence of deep pessimism among businesses in the destroyed central city zone.

The strongest change in sentiment was among retailers, who it appears are expecting a boom in their last quarter, probably based on the Rugby World Cup, and there was slow recovery in the services sector, with net negative sentiment still prevailing in the financial services sector.

“The survey shows a resilient economy heading into the latest phase of global economic uncertainty,” said Eaqub, although a net 12% of manufacturers experienced a worse quarter in September, compared with a net 2% negative in the June survey.

“Manufacturing weakness was disappointing,” he said, with falls in both domestic and export sales and a worrying disconnection between Australian and New Zealand sentiment, with Australian manufacturers significantly more pessimistic than their New Zealand counterparts – a trend rarely seen.

“Whether that’s denial, ignorance, or resilience – take your pick. It’s unusual,” said Eaqub. He said if there was a second global financial crisis, renewed cuts in interest rates could not be ruled out.

“The prospect of a cut is not to be sniffed at if a global financial crisis happens, and that’s a question mark. The RBNZ still has the option to cut rates,” he said.

However, economic growth in the year to September was likely to be steady at 1.5%, based on the QSBO responses, and there were no concerns from the survey to suggest inflation expectations were rising.

Capacity utilisation eased off a little from 89.6% in June to 88.7% in September on a national basis, but is soaring in Canterbury, and capital goods investment has stabilised, with some slight improvement.

“More than 70% of firms are saying things are flat,” said Eaqub.

Business profitability was still a net negative 14% in the quarter, but an improvement from net negative 23% in June, with a stronger rebound in Canterbury as the region starts to emerge from the worst impacts of the earthquakes experienced since September 2010.

Employment remained sluggish, but there was some wage pressure emerging, especially in the Canterbury building sector.

BusinessDesk.co.nz

Comments from our readers

On 5 October 2011 at 3:39 pm Brownie said:

The canterbury building boom cant go ahead until the insurance companies are not only able to be relied upon but will actually insure developments. Ive been in this industry for 30 years and the network im in sees either an exodus or stagnation for central city development. While this may not be the bulk of the work compared to domestic building it is still highly significant and while the intention is to get building going here the fact that consents have been granted but the project hasnt insurance means huge holding costs for canterbury business. It just doesnt work.