Headline article from the BNZ Weekly Overview of January 23.
Business Pessimism Grows
Apart from further appreciation in the NZD over the past week and more titbits of information coming out of Iraq, the two main points of interest for us economists this week were Tuesday’s release of the NZIER’s Quarterly Survey of Business Opinion (QSBO) and this morning’s Reserve Bank Review of the official cash rate. The OCR review was as expected with no change to the 5.75% but a shift in the RB’s expected path of interest rates toward a possible cut later this year if the currency holds up and resource pressures ease. While we fully expect the NZD to remain strong this year the resources pressure is a different story and shows why one should not be 100% confident of an OCR cut this year. The QSBO discussed now shows why.
The NZIER survey showed that after some seasonal adjustment the confidence of non-farm businesspeople in New Zealand dropped to a net 4% pessimistic in the December quarter (late-December) from a net 15% optimistic in the September quarter. That’s bad but its in line with other indicators suggesting NZ’s economic growth rate has capacity to halve over the coming year to between 2% and 2.5%. Of the four main groups surveyed manufacturers were the most pessimistic in unadjusted terms at –13% followed by merchants at –1% then builders at +5% and the services sector at +14%.
The sadness of manufacturers can be explained by the rise in the NZ dollar against the Australian dollar. At a net 20% positive manufacturers are still optimistic of increased exports but this is down from 31% in the September quarter and below the ten year average for this reading of 27%. But as a side note, while the NBNZ monthly survey shows that farmers are traditionally the most pessimistic group in New Zealand, in the QSBO which excludes farmers this honour goes to manufacturers. Perhaps it’s a yearning by a few for the good old days of cost-plus pricing and import licensing. Or maybe it’s a realistic assessment of the ever increasing competition from low cost manufacturers offshore.
The survey produced no reason for believing the current strength in the housing market is going to ebb in the near future. The architects survey run alongside the QSBO showed that confidence about work in their own offices on housing projects over the next 12 months rose from a net 31% optimistic in the September quarter to 38% optimistic in the December quarter. For the next 24 months the move was from 14% to 22%. The first following graph shows the broad correlation between the 12 month measure and actual dwelling construction. The result is strongly suggestive of the boom in residential construction which drove a lot of economic activity over 2002 continuing through 2003. This result is stronger than that in the NBNZ Business Outlook survey for early December released about a month ago which showed net 8% positive residential construction expectations.
Results for the services sector we can pretty much ignore because the sector is so diverse and we’ve already mentioned the most interesting result produced by the architects. But for all sectors grouped together we get right back to one of our central themes of the past couple of years – the growing shortage of skilled and unskilled labour. The QSBO showed that in the December quarter a net 39% of respondents felt skilled labour was difficult to get, up from 37% in the September quarter and above the 10 year average of 30%. For unskilled labour the December quarter result was 18% from 19% in the previous quarter and an average of 0%.
Frankly these results are not any different from what we have been seeing for the past 2-3 years. But their import is enhanced by some other results in the QSBO. A net 13% of respondents reported that they increased staff during the December quarter. This was well up from 2% the previous quarter and an average of 1.6% the past three years. A net 10% expect to boost staff numbers, well above the ten year average of 1%. A gross 16% cited labour as the main constraint on their ability to grow (people, not the party), well up from 12% in the September quarter, the ten year average of 7%, and in fact the highest reading for this measure on record. Only 53% said demand is their main constraint, the equal lowest reading on record with the other 53% being recorded in the March quarter of 1985 when NZ Inc. was about to rule the world in a deregulatory boom! In addition, a net 22% of respondents said their people worked more overtime in the December quarter, the highest reading since the end of 1994.
What do these figures mean? They back up our warning that in an environment where businesses want and need to boost output but cannot do so because they have run out of capacity and are unwilling to bite the bullet and buy million dollar machines they chase extra people instead. This process cannot go on for long before either wages get kicked through the roof, something comes along to collapse demand, or businesses bite the bullet and boost capital expenditure. The third option is optimal, but with so much uncertainty around over Iraq and businesses having their planning attention diverted by efforts to handle cost and price changes resulting from big currency moves we think we may have to wait until 2004 before the surge in capital expenditure occurs. That means a continuing tight labour market this year with upward pressure on wages and conditions.