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NZ businesses pare back optimism in March quarter, signal price hikes coming

Tuesday 4th April 2017

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New Zealand firms pared back their level of optimism in the first three months of the year as domestic trading activity stayed robust while signalling broader price hikes were on the cards as firms contend with an increasingly tight labour market and rising costs.

A seasonally adjusted net 16 percent of firms surveyed in the New Zealand Institute of Economic Research's quarterly survey of business opinion anticipate better economic conditions in the coming year, down from a net 26 percent in the December quarter. A net 21 percent experienced stronger trading in the first three months of 2017 and 25 percent are picking more expansion to come, both unchanged from the prior period. 

Firms experienced an improvement in earnings, with a net 2 percent showing better profitability in the March quarter, compared to a net zero reading in December, and a net 8 percent expect that to persist in the coming quarter. A net 15 percent of companies surveyed raised prices in the period, and a net 29 percent expect to do so in the coming quarter. 

"Despite the drop in business confidence, when it comes to own activity, indicators are still holding up at reasonable levels," NZIER senior economist Christina Leung told a briefing in Wellington. "There was a further lift in inflation pressures across pricing indicators and as capacity utilisation grows." 

Inflation returned to the Reserve Bank's target band of 1-to-3 percent in the December quarter after an extended period of soggy price increases as low interest rates, a strong currency and weak oil prices kept a lid on consumer prices, while at the same time New Zealand's record net migration expanded the labour force and limited wage increases. 

Firms continued to struggle to find labour in the March quarter, with a net 41 percent finding it hard to find skilled workers and a net 24 percent struggling with unskilled staff, compared to 36 percent for skilled hires and 24 percent for unskilled in December. A net 13 percent of firms took on more staff in the March period and a net 8 percent expect to hire in the coming three months, down from 14 percent and 17 percent in December. 

Capacity utilisation rose to a record high 93.6 percent from 92.6 percent in December, which Leung said was underpinned by the building sector. Construction remained one of the most optimistic sectors and while it faces increased capacity constraints, Leung said building firms were finding it easier to attract unskilled labour, more so than in other sectors. 

Construction activity is expected to remain high through the rest of 2017 and is seen as a cornerstone of the country's economy, although architects noted a decline in the pipeline of government work. 

Firms scaled back their investment intentions for buildings with a net 8 percent in the coming year, down from 11 percent, however a net 18 percent expect to invest in plant and machinery compared to 16 percent in December. 

Costs remained a concern for firms, with a net 23 percent experiencing higher costs in March compared to 20 percent in December, and a net 29 percent anticipating a larger expense bill in the coming quarter, compared to 18 percent in the prior period. 

Financial services firms surveyed are seeing a greater chance of an interest rate hike in the coming year, with a net 68 percent seeing a hike compared to 55 percent in December. NZIER's Leung still expects the Reserve Bank will raise the official cash rate in the middle of next year, ahead of the central bank's outlook for rates. 




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