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Business survey points to economic downturn

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  • Business survey points to economic downturn

    The economy is slowing to a crawl, according to the latest gloomy survey of business opinion by the Institute of Economic Research.

    But it also shows inflation pressures in the economy, and some economists said that pointed to a likely rise in interest rates at the end of April.

    In the March quarter survey, a net 29 per cent of firms expect general conditions to get worse in the next six months, much worse than the net 2 per cent expecting a downturn in the previous quarter survey.

    Trading activity indicators in the Nzier survey would be in line with economic growth of just 0.2 per cent in the March quarter, compared with December quarter growth of 0.6 per cent.

    The survey suggested annual growth would slow to about 2.3 per cent in the year to March 2005, compared with 3.5 per cent in calendar 2003.

    While slower than recent growth, it is not low growth, according to Nzier.

    Despite the overall gloom, businesses are running flat tack.

    "Capacity utilisation is at its highest level since 1973," the Nzier report said, with the building sector the most stretched.

    The shortage of labour is the biggest block to increasing activity for a net 23 per cent of firms - the highest per centage in 30 years. It is affecting building firms, manufacturers and service firms.

    Gloom descended on the business community in the March quarter after a rise in interest rates, turning the building sector pessimistic.

    Exporters became even more gloomy as the dollar hit a seven-year high against the United States dollar in February, before easing back recently.

    Business in the lower North Island turned from optimism to gloom after heavy floods, also in February.

    Profit margins were also being squeezed, denting confidence among shopkeepers and manufacturers.

    The survey also shows a net 24 per cent of businesses are planning to lift prices, raising the prospect of higher interest rates.

    Commenting on the survey, Citibank said the odds of the Reserve Bank lifting the official cash rate from 5.25 per cent to 5.5 per cent at the end of the month was greater than financial markets thought.

    There was a risk that leaving the rate unchanged would further fuel domestic demand, making inflation even harder to rein in down the track.

    Deutsche Bank said the Nzier survey would have reinforced the Reserve Bank's inflation concerns.

    With the New Zealand dollar trading about 4 per cent below the Reserve Bank's assumption, Deutsche Bank said there was a 55 per cent chance of another interest rate hike on April 29.

    Business confidence slumped across all sectors and regions, according to the NZIER survey, confirming National Bank's March survey of business opinion.

    The NZIER survey showed a net 20 per cent of firms reported an increase in their own activity in the March quarter.

    But only a net 10 per cent expected an increase in their own activity in the June quarter.

    However, the Nzier survey showed hiring intentions were solid, more businesses were intending to lift prices and businesses were running closer to full capacity than in the previous survey.

    Various inflation indicators pointed to consumer price inflation lifting to about 2.5 per cent this year, Nzier said.
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