Tracking the economy

Friday 18th October 2002

NZIER's latest quarterly survey of business opinion indicates strong economic growth has continued in the second half of 2002. Firms' responses about domestic sales, exports, new orders, employment intentions, and intentions to invest in plant, machinery and buildings all suggest growth.

Business confidence is up also, after an adjustment for seasonal variation. A seasonally adjusted net 18% of firms are optimistic about business conditions in the next six months. This compares with a seasonally adjusted net 8% of firms expecting an improvement in conditions in the previous survey. After seasonal variation is removed, confidence has lifted each quarter since September 2001. The rise in confidence is closely linked to the rise in domestic trading activity over this period.

However, confidence is still not as high as expected given the strength of the activity indicators. The gap between firms' assessment of their own past activity and their view on future general business conditions appears related to international events. Uncertainty about the prospects for world economic growth, volatility on world sharemarkets, and the possibility of war in Iraq has constrained business optimism.

Stronger activity suggests job growth

According to the business opinion survey, a net 2% of firms increased staffing levels over the September quarter. A net 11% of firms intend to raise employment levels over the next three months. Firms' employment intentions are consistent with annual employment growth lifting to about 4.5% by the December 2002 quarter.

Capacity utilisation edged up in the September quarter and firms' investment intentions lifted. A net 9% of firms intend to approve new investment in plant and machinery over the next year. Firms' intentions to invest in buildings also lifted this quarter.

But constraints on growth exist

High capacity utilisation will limit the rate of expansion in output. A further impediment to output growth is the difficulties firms are having in finding both skilled and unskilled labour. While sales (or demand) is consistently the most common constraint to expanding production, more firms identified labour as the factor most limiting production this quarter than at any time since June 1975.

These constraints have generated some inflationary pressures. Indicators from the survey suggest annual CPI inflation will be 2.0-2.5% through late 2002 and into 2003.

Relatively subdued inflationary pressures seem to be the result of three factors. First, large falls in prices for New Zealand commodities on world markets over the last year have generated a deflationary environment in the export sector. Second, import prices have also fallen as the exchange rate has appreciated. Third, there has been an increase in productivity. This is indicated by manufacturing and building firms reporting an increase in productivity over the September quarter.

The stronger than expected economic growth in the June 2002 quarter and the continuation of strong growth in the short term suggested by this survey is likely to result in upward revisions to economic growth forecasts for 2002. However, it is NZIER's view that the current rate of economic expansion will not continue throughout 2003. The slowdown in the world economy and the declines in commodity prices over the last year will dampen income growth through 2003.

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