1 Oct 2013

Economy in expansion mode: Bagrie

8:08 am on 1 October 2013

The business sector is seen as being in expansion mode by ANZ chief economist Cameron Bagrie.

The ANZ's monthly index of business sentiment shows optimists outnumber pessimists, with a net 54% of firms expecting economic conditions to improve in the coming year, the highest level since March 1999.

The index shows firms are extremely upbeat about their own prospects, and expect to make more money. Hiring and investment intentions also rose.

Mr Bagrie said the figures showed the country is long past recovery and into expansion.

"If we have a look at firms' own activity expectations, that's what ultimately matters," he said. "A net 45% of businesses expect better times ahead. That's sort of rock star stuff.

"Profit expectations hit a 14-year high. Employment general investment intentions, they're pretty rock solid as well."

A lot of people were talking about an economic recovery but Mr Bagrie believed the survey showed the country was well beyond that.

"The nuances we're getting from this economic survey is more consistent with an economic expansion," he said.

Construction activity was projected to rise from 8% of GDP in 2012 to 11.5% by 2017, Mr Bagrie said.

But there were already signs New Zealand could not keep up with the supplying the market, driving prices higher and putting pressure on inflation.

"If we look at pricing intentions in the construction sector, they've risen to the highest level since December 1992," he said.

"Now the historical experience has been you see a little bit of asset price, house price, inflation, that flows into construction costs and that flows into general inflation pressure and, lo and behold, the Official Cash Rate starts to move up."

That link had to be broken because the expansion needed to be prolonged "and we don't want the Reserve Bank to be following that age-old adage of taking away the punchbowl as soon as the party starts to rock", Mr Bagrie said.