5 Jul 2016

More firms expect economy to improve - survey

11:01 am on 5 July 2016

Business confidence has rebounded as fears that demand would weaken proved unfounded.

Housing construction in an East Auckland suburb

The building sector continues to lead the way in business confidence underpinned by a flow of residential, commercial and government work. Photo: RNZ / Claire Eastham-Farrelly

The Institute of Economic Research (NZIER) survey of business opinion for the March quarter shows a seasonally adjusted net 18 percent of firms expect the economy to improve over the rest of the year.

That's a sharp turnaround from the net 2 percent expecting the economy to deteriorate in the previous quarter's survey, when a gloomy dairy sector and volatile international financial markets dented confidence.

"Demand held up over the quarter, against expectations earlier in the year of a softening in demand," said NZIER senior economist Christina Leung.

The survey indicates the economy will grow about 2.8 percent.

A net 22 percent of businesses saw increased sales in the three months to June, with a net 19 percent expecting an improvement in the coming quarter.

Ms Leung said the improvement in sentiment was widespread across sectors and regions.

"Nonetheless, there remains a divergence in business confidence between the urban and rural regions, reflecting the differing fortunes of the tourism and dairy industries.

"Although business confidence in the dairy intensive regions including Taranaki and Southland improved, pessimists still outnumbered optimists."

By sector, the building sector continues to lead the way, underpinned by a solid pipeline of residential, commercial and government work.

Construction firms intend to invest and hire more, though the NZIER warns the number of those surveyed report the shortage of skilled staff is the most acute since 2003.

Manufacturing confidence rose, led by stronger domestic demand. In contrast, export demand softened.

Retailers are also more upbeat about the outlook for sales.

Profitability rose due to easing cost pressures and firms finding it slightly easier to lift prices.

A net 1 percent of businesses raised prices over the June quarter, compared to the net 5 percent of firms which cut prices in the March quarter.

"We expect annual inflation will lift gradually over the coming years. However, the subdued inflation outlook indicates further scope to cut the OCR," Ms Leung said.

While the survey closed before Britain's decision to leave the European Union, Ms Leung said the heightened uncertainty from Brexit could prompt the Reserve Bank to cut interest rates in August to help insulate the economy against any possible risk of slowing global growth.