NZ businesses turn optimistic in June quarter as profit expectations improve

Tuesday 5th July 2016

New Zealand firms turned optimistic about the state of the economy in the June quarter as moderating cost pressures helped boost margins and lifted profit expectations.

A seasonally adjusted net 18 percent of firms surveyed in the New Zealand Institute of Economic Research's quarterly survey of business opinion expect general business to improve, turning from a net 2 percent of pessimistic responses three months earlier. A net 22 percent of those companies experienced stronger trading activity in the past quarter, and a net 19 percent see more expansion in the coming three months, up from 18 percent and 6 percent respectively in March.

Stronger profit expectations helped underpin the pick-up in confidence, with a net 2 percent experiencing bigger profits in the past quarter and a net 16 percent expecting more gains in the coming period. Fewer companies faced higher costs in the June quarter, and 19 percent anticipate an increase in expenses, compared to 24 percent in March, while a net 1 percent raised their prices in the June quarter, and a net 11 percent expect to hike prices in the coming period.

"Moderating cost pressures and improved pricing power have seen an improvement in profitability amongst businesses," NZIER senior economist Christina Leung said in a statement. "Demand held up over the quarter, against expectations earlier this year of a softening in demand."

The QSBO follows ANZ Bank New Zealand's business confidence survey last week, which showed optimism was at a six-month high in June as the country's booming tourism and construction sectors continued to support economic activity.

Leung said the building pipeline was a key driver in the economy and expects gross domestic product will peak at 3 percent in the June quarter, before moderating to 2.8 percent by the end of the year.

The construction sector's strength is also driving demand for staff, and hiring intentions across all sectors showed a net 13 percent intend to take on new employees in the coming quarter, though a net 39 percent are finding it hard to find skilled staff and a net 13 percent are struggling to find unskilled workers.

"One thing to be watching out for is that skill shortages are becoming more acute, particularly in the building sector," Leung told a briefing in Wellington. "That is definitely something that could be limiting the degree to which building activity can ramp up over the coming years."

Still, wages remained fairly well contained with a lot of people looking for work, and Leung said that created a buffer for businesses "when it comes to how much to lift wages" which will mitigate their cost pressures.

Investment intentions improved, with a net 11 percent looking to buy new buildings, up from 2 percent in March, and a net 18 percent expecting to invest in plant and machinery, up from 11 percent.

Leung said the NZIER expects inflation will increase "gradually over the coming years" and anticipates the Reserve Bank will cut the official cash rate at next month's meeting.

The survey was held before the UK referendum on leaving the European Union and Australia's federal election, which has created more uncertainty to the global economy and "suggests a greater risk the Reserve Bank will choose to cut the OCR in August in a bid to buffer the New Zealand economy against any downside risks," Leung said.

The QSBO doesn't cover agriculture, although the regional breakdown showed South Island firms turned optimistic about the economy in the June quarter at a net 12 percent seeing good times ahead, compared to a net 12 percent of pessimists in the March quarter. Upper North Island firms were the most upbeat at a net 24 percent optimists, up from 0 percent in March, while lower North Island companies' confidence improved to a net 16 percent optimistic from a net 5 percent three months earlier.

BusinessDesk.co.nz

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