Businesses more optimistic but skills shortages at levels not seen since 2007

New Zealand businesses were more optimistic about the state of the economy and their own activity in the September quarter, even as their profits were squeezed by rising costs and an inability to hike prices.

A seasonally adjusted net 26% of firms surveyed in the New Zealand Institute of Economic Research's quarterly survey of business opinion expect general business to improve, up from a net 19% in June.

A net 26 % experienced stronger trading activity in the past three months and 32% see more expansion in the coming quarter, up from 22% on both measures in June.

That upbeat outlook was in spite of a net 1% experiencing declining profits in the previous quarter as a net 21% of respondents faced higher costs and a net 4% had to lower prices.

Still, firms remain optimistic with a net 20% predicting higher profits in the coming period, up from 16% in June, even with a net 23% expecting increased costs and 7% hoping to raise prices.

"Although there was a further lift in confidence in the services sector and firms continue to report high levels of demand, profitability deteriorated over the past quarter," the NZIER says.

"This reflected firms' increased difficulty in passing on rising costs, particularly in financial services."

New Zealand's economic activity has been underpinned by a construction sector buoyed by the Canterbury rebuild and Auckland's housing shortage, as well as record inflows of tourists and net migration supporting consumer demand.

The survey of 925 firms doesn't directly cover agriculture, but it shows increased confidence across most regions, with the recent hike in the forecast payout to dairy farmers underpinning gains in rural areas.

A net 25% of South Island firms predict good times ahead, up from 12% in June, while Upper North Island business confidence improved two percentage points to 26%, and Lower North Island business confidence rose three percentage points to 19%.

Principal economist Christina Leung says NZIER expects annual economic growth of 3.5% this year, before moderating to an annual 3% pace over the next five years. In the June quarter, Leung had been expecting annual growth of 3% this year, slowing to 2.8 %.

Construction remained the most upbeat sector with the country's strong pipeline of residential and commercial work, and architects reporting strong growth in demand for their services.

Retail was one of the few sectors to increase profitability, with cost pressures easing and merchants able to raise prices in the period.

That outlook gave firms confidence in taking on new staff, with a net 27% of firms expecting to hire in the next quarter, though only a net 4% managed to increase headcount in the previous three months.

While companies want to take on new staff, they're still finding it hard to find workers, with a net 41% saying it was difficult to get skilled labour and a net 14% struggling to hire unskilled labour.

"Businesses report increased difficulty in finding labour, and this may have limited the extent to which firms could increase headcount over the past quarter," Ms Leung says. "The difficulty in finding workers is particularly acute for skilled labour, with shortages at levels not seen since December 2007."

Ms Leung says the limited ability of firms to raise prices means inflation will probably stay subdued for the rest of 2016, and a net 37% of financial services firms expect lower interest rates in the coming year.

"We do expect an OCR (official cash rate) cut in November and another one sometime in the middle of next year," Ms Leung says. "We expect the OCR to trough at 1.5%."

Investment intentions were steady, with a net 17% looking to buy new plant and machinery, and 9% expecting to invest in new buildings.

(BusinessDesk)