The New Zealand Institute of Economic Research (NZIER) Quarterly Survey of Business Opinionshowed that business confidence improved in late 2015, although it remains below the peak seen in 2014 when the economy was humming along at around a 4% annual growth pace.
Indicators of pricing pressures also picked up compared to September, although they did not suggest a near-term breakout in inflation from its very weak recent pace.
The sharp rise in general business sentiment, from a net -10% to +13%, overstates the case: this measure of confidence had plunged in the September quarter even as the other details of the survey pointed to an improvement in conditions.
Firms’ own reported activity, which corresponds much more closely with GDP growth, saw a more modest increase from 12% to 18%.
Confidence at these levels is broadly consistent with our current forecast of 0.6% GDP growth in the December quarter, with some mild upside risk, following on from a 0.9% rise in the September quarter.
There is no doubt that economic conditions strengthened over the second half of 2015 compared to the weak first half.
Nevertheless, a number of headwinds to growth, including weak returns from dairying and the plateauing of the Christchurch rebuild, suggest that the days of 1% growth per quarter are well and truly past for this cycle.
The various indicators of price pressures painted a stronger picture compared to the September quarter, though still quite benign compared to a longer history. Capacity utilisation rose from 92% to 93%, nearing the record high reached last June, and 17% of firms reported that capacity was their biggest constraint on growth, the highest share in the history of the survey. Curiously, though, firms seem less inclined to address that constraint: planned investment in buildings and machinery fell for the third straight quarter.
There are indications that firms may be looking to people power to address those constraints instead. Actual and intended hiring remained at historically high levels, and the reported difficulty of finding skilled workers rose again after having eased in the previous two quarters.
Overall, though, labour remains a much less severe constraint today than it was during the boom of mid-2000s.
Service sector robust
Meanwhile, a net 5% of firms said that they had increased prices over the last quarter, compared to a net 9% reporting price decreases in the September quarter.
However, the turnaround was concentrated in the services sector, and we suspect this was another case where the September quarter weakness was overstated.
In sectors such as manufacturing and retailing, where the weaker New Zealand dollar could be expected to put upward pressure on costs and prices, there is certainly a desire to raise prices but little evidence that firms have been able to do so yet.
We still expect the lower exchange rate to have some effect on tradable goods prices over the next year.
But with world oil prices plunging for the second time in two years, it now looks likely that headline inflation will remain below 1% for most if not all of 2016.
Michael Gordon is Senior Economist at Westpac Banking Group New Zealand