The Quarterly Survey of Business Opinion for June was generally softer compared to March, but it remains consistent with a normal pace of recovery.
In seasonally adjusted terms, own-activity expectations dipped from 19% to 16%, while expectations of general business conditions fell from 34% to 28%. To put these in context, own-activity expectations are still slightly above their historical average of 15%. The drop in general confidence still makes it the secondhighest reading in eleven years.
What’s more, while expectations for the next quarter were down, reported conditions for the past quarter continue to improve. The former tends to be the better indicator of current-quarter GDP (which perhaps tells us that ‘expectations’aren’t all that forward-looking), but the narrowing of the gap between the two should help to silence the sceptics, who have tried to dismiss the recovery by noting that expectations have fallen short of reality – as they have done consistently for over 20 years in this survey.
In a similar vein, many of the key activity indicators were softer in Q2. Employment intentions fell slightly to a net +1%, while profit expectations fell from -2% to -6%. But that merely puts them slightly above their long-term averages. As we’ve noted before, the levels of these indicators need to be read in comparison to their history. The fall in confidence was most notable in the building industry, which is consistent with the sluggish trends in consented
activity in recent months.
The looming spectre of changes to the tax treatment of property (culminating with the removalof depreciation allowances in the May Budget) won’t have helped sentiment. On the plus side, general expectations were up in the manufacturing sector, although that wasn’t really replicated when it came to the detailed questions. The biggest rise in confidence was in retail, which certainly had room to improve from a dismal March quarter for sales volumes.
While activity indicators have gone from extremely weak to merely average over the last couple of years, there’s little to suggest that the post-recession economy has been left with an overhang of spare capacity – indeed, quite the opposite. Capacity utilisation rose slightly to 90.8%, putting it right on its average for the last decade. The rise was concentrated in the building industry – bear in mind that ‘capacity utilisation’ is actually a question about unit costs, and there have been some well-publicised price increases for building materials this year. The ease of finding workers fell again,with skilled workers tipping back into “hard to find” on balance.
Pricing indicators rose substantially, with a net 36% of firms expecting their costs to increase and a net 40% planning to raise their prices in NZ Interest Rates of this will reflect the increase in GST from 1 October, we would expect this to show up more fully in the next quarter. Policy changes shouldn’t detract from the underlying inflation picture; even in the previous survey, pricing intentions were running at a net 27%, well above the lowinflation era average of 17%.
Evidence of rising price pressures and a lack of spare capacity won’t come as a surprise to the RBNZ. In the June Monetary Policy Statement the RBNZ drastically revised down its assumption about the economy’s potential growth rate, which means that even moderate growth could be expected to generate inflation pressures. Even without the impact of various government charges, inflation was projected to return to 2.7% by the end of next year.
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