'Wafer thin' margins for businesses as economy stays flat

The latest of the country's major business mood surveys points to "lack-lustre" growth.

The New Zealand Institute of Economic Research's latest quarterly survey opinion shows businesses, as a group, turning negative on their outlook for the economy.

Responses to the latest survey, of about 2500 firms, shows the average outlook by companies for the next three months has shifted from +21% in the last quarter to -1%.

Expectations for their own businesses are slightly more optimistic, with an average of +9%.

However, businesses expect margins to get much tighter, with costs dropping but expected prices dropping further.

There are signs of growth in Canterbury as the region begins to rebuild after the series of earthquakes, but the rest of the country is flat, principal economist Shamubeel Eaqub says.

The slow pick-up in the economy, as compared to the accelerated growth which New Zealand experienced coming out of the last three recessions, is because this downturn has been different, he says.

The previous recessions have not had the need to "repair balance sheets" – that is, to reduce debt – being experienced this time.

Previous recoveries have seen debt increase in aggregate terms. This time, households are reducing debt and that has flowed through to the country's business sector.

The implications of today's data – and the recent run of price and activity data – is that the Reserve Bank will not need to worry about inflation for some time, Mr Eaqub says.

Today's survey points to price inflation of about 1%, right at the bottom of the Reserve Bank's 1%-3% target range.

While capacity constraints are emerging in Canterbury, and this is showing price and wage pressures, that has not spread to the rest of the country, he says.

"In the retail sector there is outright deflation." That means the Reserve Bank will not need to raise the official cash rate until early 2014.

The OCR is at a record low of 2.5% and the Reserve Bank should consider cutting the rate, he says.

"While a rate cut would not have a huge impetus in driving grater growth, it might take the edge off the currency, which might help the New Zealand economy a bit."