NZ business confidence strong, profitability weak: QSBO

Tuesday 20th January 2015

New Zealand business confidence remains at historically high levels, but profitability remains weak as firms lack confidence to push up prices in spite of comparative economic buoyancy, according to the latest quarterly survey of business opinion from the New Zealand Institute of Economic Research.

“The economy is not nearly as strong as we think,” said principal economist Shamubeel Eaqub at a briefing in Wellington, even though annualised growth implied by the QSBO of 3 percent in the March 2015 year is high by historical standards. That said, growth has resumed after a lull in mid 2014, the survey finds.

“Business confidence has stabilised at 21 percent net optimists, after adjusting for the usual seasonal variations,” said NZIER. “While optimism has faded from the heady highs of late 2013 and early 2014, firms are optimistic relative to history.”

Hiring intentions are very strong, increased residential building activity is expected by both builders and architects, and spare capacity in the economy continues to reduce, but commercial building activity expectations have softened and construction activity by government agencies is expected to shrink in the first three months of this year.

A surge in retailer optimism, underpinned by strong sales growth in the Christmas shopping season and an expectation of ongoing strength was a notable feature in the latest survey, although “optimism faded for builders, manufacturers and service firms.”

A net zero manufacturers reported increased exports in the December quarter, compared with a net 18 percent experiencing export growth in the September quarter last year, while profitability experienced across all firms surveyed was down by a net 4 percent in the December quarter, reflecting ongoing margin constraints and competitive trading conditions.

A net 4 percent expect improved profitability in the current quarter, the QSBO found.

In the current climate, there was no case for the Reserve Bank of New Zealand to raise interest rates this year, especially given the range of threats to the global economy in 2015, said Eaqub. To think otherwise was “folly.”

“Cost pressures are contained and inflation is easing. Experienced and expected costs remain broadly stable at a historically low level. Actual price increases eased, as did inflation expectations.”

Average selling prices rose for a net 9 percent of respondents in the December quarter, compared with a net 26 percent positive in the previous quarter, despite domestic trading activity improving for a net 20 percent of firms surveyed, compared with 15 percent net positive the previous quarter.

A net 21 percent of respondents to the survey saying they expected to hire more staff in the current quarter, although much of the labour market demand was concentrated in a few regions and industries.

“Auckland produced 80 percent of the new jobs in the last seven years,” said Eaqub. “Most of the recovery is in financial services.”

Still, the South Island showed the strongest improvement in business confidence, rising to a net 23 percent positive in the latest survey, compared with 7 percent in the September QSBO.

The lower North Island also showed a net 20 percent positive sentiment, compared with 9 percent in September last year. Firms operating in the upper North Island showed a slight increase in net optimism, rising from 25 percent to 27 percent between the September and December surveys.

However, firms operating throughout New Zealand reported a dip in net optimism, from a net 22 percent positive to 18 percent between the two respective surveys, still high compared to the long run average of a net 7 percent negative.

New Zealand economy wide, net positive sentiment stood at 23 percent, compared with 19 percent in the September survey, but still well down on the heady net 53 percent positive recorded in the same survey a year earlier.

BusinessDesk.co.nz

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