15 Jan 2019

Business confidence up but profit squeeze worries

11:59 am on 15 January 2019

Business confidence has bounced back from a nine year low, but firms remain wary about higher costs and weaker profits.

The Institute of Economic Research's (NZIER) latest quarterly business survey shows a net 18 percent of firms expect economic conditions to worsen in the coming months compared with 28 percent in September.

Businesses were more positive about their own future prospects, regarded as a better economic barometer, with a net 17 percent expecting an improvement in their own activity over the next six months.

NZIER principal economist Christina Leung said previous dissatisfaction about government policies, which was blamed as a factor in the slump in confidence, appeared to have eased with businesses seeing more certainty.

She said firms have stronger demand but are being squeezed by rising costs.

"But businesses are reporting that it still remains difficult to pass these rising costs on to customers in higher prices and this negative impact on profitability is weighing on sentiment."

Nearly a quarter of firms reported a drop in profits, and a net 15 percent expected profits to fall in the next three months, the weakest level in nearly eight years.

Ms Leung said the latest survey pointed to growth slowing to about 2.2 percent in the December year, compared to the latest official reading of 2.6 percent in September.

The survey showed more firms had hired staff and expecting to take on more workers, although finding suitably skilled staff remained a problem.

"Firms are also looking to increase new investment in plant and machinery over the coming year. However, firms are more cautious when it comes to new investment in buildings," Ms Leung said.

Manufacturers were the most pessimistic group, followed by the building sector. The Nelson and Wellington regions were the most optimistic, while pessimism in Auckland deepened.

Ms Leung said the survey suggested the Reserve Bank could hold the Official Cash Rate through to early 2020 before starting on gradual rises.

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