Business optimism misplaced, says NZIER

The economy is only experiencing "modest" growth, according to the latest business mood survey.

The New Zealand Institute of Economic Research's quarterly survey of business opinion paints a picture of an economic recovery still happening but not showing much oomph.

In an unusual move, the institute's principal economist, Shamubeel Eaqub, says business expectations in the survey should be ignored.

The survey of 2500 New Zealand firms records what they expect the next three months to bring, along with what they experienced over the previous three months.

Today's survey showed a jump in expectations but Mr Eaqub says this is almost definitely wrong.

"Expectations have become really unreliable over the past few years. What we are going through is very unusual... Deleveraging is something you get in a once in heaven knows how many decades.

"Over the past three years, expectations have been more optimistic than reality."

The experienced activity over the past three months recorded in the survey is consistent with a flat economy, he says, and he expects that to continue.

"Most indicators are going sideways, suggesting a gradual and patchy economic recovery. The economy is expanding, but modestly."

"Modest" was the word featuring most frequently in the survey.

"The pace of recovery is modest and has not accelerated in the past nine months," Mr Eaqub said.

"Profitability is stabilising at a modest level. The gradual recovery in sales is supporting a similarly gradual pace of job increases.

"While labour is getting harder to find in Canterbury, it is less so elsewhere. This will keep wage increases muted."

On a sector basis, the beleaguered services sector is showing the most improvement, but even there "the pace of growth is historically low".

"Manufacturing exports are flat, but domestic sales are deteriorating," he said. Manufacturing in particular seems to be hit by a "noxious mix" of rising inventories and weakening demand, he says.

"Retailing slowed a touch; rising inventories and weakening prices suggest demand is subdued. Building activity is slowing, building material weakness is offsetting a lift in construction."

What growth there is appears to be driven by the Canterbury rebuild, he said. Once that is allowed for, the economy is likely to remain "flat" over 2012, he says.

Of particular concern is the hauling back of firms' planned investment in plant and machinery.

"You would expect to see, if we are to see a business led recovery, a strong investment in plant and machinery. But it isn't surprising, because the economy is still pretty weak, that firms are not so keen to invest."

There was a pick up over the last year in capital investment, including plant and machinery, which was shown in trade and GDP figures, but indications are that was tailing off towards the end of last year.

Pricing, hiring and wage increase intentions are also "modest" he says, suggesting the Reserve Bank will be leaving the official cash rate (OCR) where it is for some time.

"We think the Reserve Bank is firmly on hold at least until the middle of next year, and unless the global economy picks up, maybe even later."

The OCR is currently at a historic low of 2.5%. The next OCR review is due on April 26.

A net 57% of financial services sector respondents expect interest rates to rise in the coming year, compared to 26% previously, the institute found.

Optimism about the coming quarter was expressed by a net 24% of surveyed businesses, up from a net 1% in the previous survey.

But their experienced trading activity was lacklustre in the period, improving to zero percent in the March quarter from a negative 4% the period before.

And just 0.3% growth was recorded in government figures in the final three months of 2011.

This was just half of what economists expected, after a weak manufacturing sector dragged down the headline reading. 

The institute says today’s QSBO reading is consistent with annual growth of about 2%.

Profitability expectations improved from a negative 15% from negative 17% in the December period, while expectations rose to 4% for the next quarter from zero.

Investment intentions in plant and machinery declined to negative 2% from zero previously, though building investment improved to negative 4% from negative 6%. 

Manufacturing confidence improved to 11% from negative 13% in December, and experienced output gained to 3% from zero percent.

New orders in the building industry improved to negative 7% from negative 21%. Output, however, deteriorated to negative 11% to negative 7%.

Finding skilled labour remained difficult, at negative 21% from negative 19%. Employment was flat at 1% and hiring intentions declined to 5% from 7%.