7 Oct 2014

Business confidence drops - survey

2:57 pm on 7 October 2014

The Institute of Economic Research's latest survey of business opinion found a net 20 percent of firms expect economic conditions to improve in the three months to September, compared with a net 32 percent in the previous quarter.

Business confidence has continued to wane according to the Institute of Economic Research.

Business confidence has continued to wane according to the Institute of Economic Research. Photo: PHOTO NZ

In December last year, 52 percent were optimistic.

Firms' own trading activity, which the institute said closely mirrors economic growth, eased slightly to a net 14 percent, consistent with annual economic growth of about 2.8 percent.

Principal economist Shamubeel Eaqub said optimism has been higher than actual activity in the last six months, which indicates a moderating economy.

Mr Eaqub said firms' profitability worsened during the quarter, due mainly to slower sales.

Capacity pressures dipped nationwide, including in Canterbury, with labour being a little easier to find.

Mr Eaqub said firms appear to be taking a cautious approach, with hiring and investment intentions also easing.

But he said businesses' economic optimism and expectations still remain positive.

The survey suggests ongoing increases in hiring and moderate wage increases, albeit at a slower pace compared to late 2013 and early this year.

Firms expectations wane

Firms' expectations about their own activity waned from a net 32 percent expecting good times ahead, to 29 percent.

Mr Eaqub said that was a more reliable measure of future economic growth and suggested a still reasonably strong level of activity.

He said there had been a gap been businesses' intentions, on such matters as hiring staff, investment and sales, and what had actually happened.

Mr Eaqub said although annual growth remained healthy, momentum had slowed in the second half of the year, because of rising interest rates and plunging dairy prices.

"If this momentum continues, and we continue to lose this pace - this buzz in the economy - then it might be an issue for 2015.

"So we're still talking about a very healthy pace of economic growth this year. It was very strong in the first half of the year it will be less strong in the second half of this year."

Costs up

Costs and prices have risen in the last six months, which the institute said is consistent with inflation of about 2.5 percent by early 2015.

Mr Eaqub said rising prices are partly due to cost increases, but also firms' expanding their margins.

He said whether the recent expansion in margins can be sustained will depend on the durability of sales growth and whether buyers are willing to pay higher prices.

The moderating economy, he said, and some signs that capacity is easing, means the Reserve Bank will take a wait and see approach to the next move in interest rates. He said the next rise is likely to be in early 2016.