10 Jul 2012

NZIER head dismisses inflation claim

6:30 pm on 10 July 2012

The head of the Institute of Economic Research is dismissing claims his organisation's quarterly survey of business opinion shows a looming inflation problem.

The comment by principal economist Shamubeel Eaqub comes despite the survey showing sentiment turning negative for the first time in a year in the June quarter.

Business confidence is down, due to Europe's debt crisis and signs of a stalling recovery.

The NZIER survey found a seasonally adjusted net 1% of firms expect business conditions to worsen in the next six months - a turnaround from 21% of respondents feeling optimistic in the previous quarter.

The survey shows the amount of capacity in the economy that firms can use to grow is above its historical average. Trading activity edged up, which the institute says is consistent with economic growth of 2% and inflation of 1% to 2%.

The BNZ says that shows it will not take much more economic growth to create an inflation problem for the Reserve Bank and interest rates can't stay at record lows for too long.

But Mr Eaqub says inflation is not a problem as the New Zealand economy is too weak for firms to start raising prices. He says retailers are reducing prices, as larger firms fight for market share amid flat demand for products.

Company profits remain under intense pressure from weak sales and thin margins, putting off firms from investing more, he says.

The NZIER survey shows that the only improvement was in earthquake-hit Canterbury where 95% of building firms reported an increase in activity, although pressure on the labour market in the region was evident.