NZIER's QSBO shows rebound in business confidence in Sept qtr to highest since 2003; suggests 3% GDP growth; but inflation subdued

By Bernard Hickey

The New Zealand Institute of Economic Research's (NZIER) closely watched Quarterly Survey of Business Opinion (QSBO) showed a rebound in business confidence in the September quarter after a dip around the middle of 2013.

However, it also showed a disturbing slump in investment intentions in Canterbury during a quarter when the Christchurch Council was stripped of its ability to issue building consents, triggering a central government intervention to take over consenting.

NZIER said the results of the survey of over 900 2,500 businesses were broadly consistent with an economy growing at around 3% annually. It said inflationary pressures were concentrated in Canterbury and there was little evidence they had yet to spill over to other regions. The Reserve Bank has previously warned it is watching closely for signs of just such a spill-over as it prepares to raise ithe Official Cash Rate (OCR) some time in 2014.

The survey found the net percentage of firms expecting their own business conditions to improve in the next quarter improved to 23% from 19% in the June quarter. It had fallen from 21% in each of the December 2012 and March 2013 quarters. The September quarter result was the highest result since the September quarter of 2003 and above the long run average of 11%.

NZIER Economist Shamubeel Eaqub said the survey had not changed his view on when the Reserve Bank should lift the OCR. "It doesn't fell like we're running too fast just yet," he said.

Businesses said in the survey they expected interest rates to rise in 2014 and their views were little changed by the Reserve Bank's August 20 announcement of a 10% speed limit on new High Loan to Value Ratio (LVR) mortgages. The survey was conducted in the first half of September.

"We're still not seeing inflation pressures, but it's definitely heading upwards," Eaqub told a news conference releasing the results.

Canterbury investment intentions slump

However, the survey also showed a slump in building and investment intentions in Canterbury in the September quarter to their lowest level since the February 2011 earthquake.

Eaqub said it was too early to say what had caused the fall in investment intentions or whether it was just a one-off that would wash out in future quarters.

"This is just a warning sign there's something going on with the Canterbury rebuild that's not quite right,"  he said.

Wages, jobs and retail still subdued

The momentum across the business confidence survey was uneven, NZIER noted. The services sector, which made up around two thirds of the economy was strengthening, while retail and manufacturing activity was steady. The survey does not cover the agricultural sector.

It also noted subdued wage inflation and price inflation pressure.

"This has been one of the conundrums," Eaqub said of a "disconnect" between difficulties finding labour and wage inflation. The survey found a net negative 29% found it easy to find skilled labour, up from a negative net 26% the previous quarter. Yet wage inflation remains stuck at just over 2%.

Eaqub said he expected the jobs growth and wage inflation to eventually come through.

"It feels like we're on the cusp," he said of an improvement in the labour market, given most of the growth in output in recent years had come from improved productivity and more hours worked, rather than large numbers of new hires. 

He said there were few signs yet of any sort of structural shift in New Zealand in favour of a higher profit share and a lower wage share, as had been seen in America.

The retail sector was also seeing subdued investment and hiring intentions, despite relatively strong levels of business confidence. "The rate of sales growth hasn't been strong and there's quite a bit of deflation," he said.

Economists react

ANZ Economist Mark Smith there was little in the QSBO that would have surprised the Reserve Bank. 

"The spirit of the QSBO is that increasing pressures on capacity are likely to prompt OCR hikes, but this continues to be a 2014 story," Smith said.

The New Zealand dollar was barely changed after the survey's release at 10 am.

ASB Economist Daniel Smith said one of the encouraging findings in the QSBO survey was a rise in hiring intentions to a net 17% from a net 9% in the June quarter (the strongest reading since late 2004), although actual hiring during the September quarter fell to 1% from 3% the previous quarter.

"That suggests that labour market conditions are likely to improve more rapidly," Smith.

Westpac Economist Michael Gordon said the survey suggested a modest tightening in inflation pressures. 

"Capacity utilisation is above-average and workers are increasingly difficult to find, but still relatively few firms have been able to increase their prices," he said.

BNZ Economist Craig Ebert said the QSBO showed the economy was headed for its speed limits with GDP expected to grow 1% in each of the September, December and March quarters.

"This will put the economy firmly into a position of excess demand, overall, given the economy’s speed limit is nowhere near 4% annualized, not much more than 2% we reckon. This will put upward pressure on inflation," Ebert said.

"On the signs of a stalling in investment in Canterbury we prefer to see the next quarter’s results before passing judgement," Ebert said.

"Growth in the region has been so abnormal that the odd pause for breath should not come as a great surprise. That the construction upswing is still very much underway is more than obvious from architects’ response to the latest QSBO," he said.

"Indeed, their view about their work got even more stratospheric, especially via a sharply improved view on Government projects."

(Updated with more detail, quotes, chart, correction to number of businesses surveyed, economists' reaction)