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Fall in business sentiment not as bad as feared

Tuesday 5th April 2011

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A decline in business sentiment shown in a key survey published today was expected following the devastating earthquake in Christchurch, but the fall was not as bad as some analysts had feared.

The New Zealand Institute of Economic Research's (NZIER) Quarterly Survey of Business Opinion (QSBO) found that on a seasonally adjusted basis a net 5% of firms experienced a decline in trading activity in the March quarter, compared to a net 1% in the December quarter.

A net 11% of firms were pessimistic in the three months to March, compared to a net 1% in the December survey.

"Economic and employment conditions are stable outside of Canterbury, but there are some warning signs," NZIER principal economist Shamubeel Eaqub said today.

"Profitability is being eroded by rising costs while prices are restrained by weak demand. This is limiting new investment and the recovery.

"Rising overdue debtors, increasing inventories and barely any recovery for small firms suggest the economy is still fragile."

With 40% of Canterbury firms unable to respond to the survey following the February 22 earthquake, NZIER estimated that a net 55% of firms in the region had a fall in trading activity.

Elsewhere a net 2% of firms reported a decline in trading activity, down from 4% reporting an increase in the December quarter.

Some tightening in labour market indicators showed up, with skilled and unskilled labour harder to find, while outside Canterbury hiring intentions remained stable.

ANZ economist Mark Smith and senior economist Sharon Zollner said seismic events were taking their toll, but the impact could have been much worse.

A feature evident in the Canterbury data was that quite a lot of activity had been displaced but not halted, with details of the QSBO suggesting suburban retailers were doing quite nicely out of the closure of the central business district, the ANZ economists said.

Crucially the Canterbury manufacturing sector was performing very well, with little sign of earthquake disruption.

The key was whether the March quarter QSBO was a one-off, the ANZ economists said.

The Government was moving quickly on the Canterbury reconstruction and progress was being made.

Surprisingly, architects were less optimistic about future work, but that was likely to be reversed in the next few months.

"The decline in sentiment was to be expected considering seismic events in Canterbury. Encouragingly, however, details of the survey were more positive than we would have expected," the ANZ economists said.

"We expect confidence measures to rebound over the remainder of the year and to underpin solid growth from the second half of the year."

BNZ head of research Stephen Toplis said the economy was barely above water, but given the significant shocks which had battered it, that was perhaps a remarkable outcome.

For now, rising inflationary pressure was not being converted to rising inflation, although the platform was perhaps being laid for problems ahead.



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