Business confidence steady in June quarter as construction stutters

New Zealand firms' optimism about the economy held firm in the June quarter, despite confidence in the building sector easing after soft construction activity at the start of the year.

A seasonally adjusted net 18 percent of firms surveyed in the New Zealand Institute of Economic Research's quarterly survey of business opinion anticipate better economic conditions in the coming year, unchanged from the March quarter. A seasonally adjusted net 18 percent experienced stronger trading in the second three months of 2017 versus 20 percent in the March quarter while 23 percent are picking more expansion to come in the next quarter down from 25 percent in the March quarter.

Within the building sector, confidence dropped from 31 percent in March to 18 percent in June. The move likely reflects softer construction activity earlier this year, NZIER senior economist Christina Leung told a briefing in Wellington.

However, a rebound in architects' work in their own offices across residential, non-residential and government work point to solid growth in the pipeline. "This indicates a recovery in construction activity from the softness seen in the March quarter," said Leung.

Firms experienced a dip in earnings with 1 percent showing worse profitability in the June quarter, compared with 2 percent that saw better profitability in the March quarter. Only a net 6 percent expect better profitability in the coming quarter, versus 8 percent in the prior quarter. Profitability was particularly weak in the retail sector. "Cost pressures in the sector have intensified, and with pricing power still relatively limited this is having a negative effect on profitability," Leung said.

A net 26 percent of companies surveyed raised prices in the period, and a net 28 percent expect to do so in the coming quarter.

"Overall, it still points to a reasonably solid growth outlook in the New Zealand economy," said Leung. Forward looking indicators suggest around 4 percent annual growth but "we are expecting it to be closer to around 3 percent," she said.

Inflation returned to the Reserve Bank's target band of 1-to-3 percent in the December quarter and accelerated in March after an extended period of soggy price increases as low interest rates, a strong currency and weak oil prices kept a lid on consumer prices, while at the same time New Zealand's record net migration expanded the labour force and limited wage increases.

Construction confidence has decreased even though there is more work

Firms continued to struggle to find labour in the June quarter, with a net 47 percent saying it was hard to find skilled workers and a net 23 percent struggling with unskilled staff, compared to 41 percent for skilled hires and 24 percent for unskilled in March. A net 13 percent of firms took on more staff in the June period and a net 12 percent expect to hire in the coming three months, versus 13 percent and 8 percent in March.

However, capacity utilisation was 92.1 percent from 93.6 percent in March, largely driven by an easing in the construction sector, said Leung.

Firms scaled back their investment intentions for buildings with a net 3 percent expecting to invest in the coming year, down from 8 percent, however a net 20 percent expect to invest in plant and machinery compared to 18 percent in March. Leung said this may be an attempt to offset the acute labour shortages.

Costs remained a concern for firms, with a net 26 percent experiencing higher costs in June compared to 23 percent in March and a net 28 percent anticipating a larger expense bill in the coming quarter, compared to 29 percent in the prior period.

Financial services firms surveyed are seeing less chance of an interest rate hike in the coming year, with a net 38 percent seeing a hike compared to 68 percent in March. NZIER's Leung still expects the Reserve Bank will raise the official cash rate in the middle of next year, ahead of the central bank's outlook for rates.

(BusinessDesk)