Recovery at last?

Economic activity in the December quarter  surged to the best level since mid-2007 according to the New Zealand Institute of Economic Research’s Quarterly Survey of Business Opinion.

Businesses are more optimistic (+19% from -1%, seasonally adjusted). The trading activity indicator for the December quarter also surged to the best level since mid-2007 (+8% from -4%, seasonally adjusted). This suggests annual GDP growth for 2012 will be above 2%.

“There are encouraging signs of a strengthening economic recovery. The latest bounce is concentrated in Auckland, and Canterbury to a lesser extent,” said Shamubeel Eaqub, Principal Economist at NZIER.

Subdued labour market

The latest pickup is not yet flowing through to the labour market. New hiring remains subdued and labour is getting a little easier to find outside of Canterbury. This is surprising as a recovery in activity tends to be accompanied by more jobs and increasing competition for labour that raises wages. This part of the recovery remains absent. It may be explained by reduced working hours during the recession, which are now returning to more normal levels, rather than through increased hiring.

Investment intentions, while positive, are also low compared to what we normally see in a recovery phase.

Little inflation

Capacity pressures are intense in Canterbury, but there is little pressure in the rest of the country. Firms do not intend to raise prices much. Consumer price inflation will remain low. Margins remain under pressure, but profits are beginning to lift on the back of better sales volumes.

RBNZ to hold interest rates steady

The RBNZ will keep interest rates on hold for some time. The QSBO shows the beginnings of a recovery, but still very low inflation.

One quarter does not a full recovery make but it is a long awaited sign of improvement.

The Christchurch rebuild is having a positive impact further afield than Canterbury.

Building tradespeople I’ve spoken to in Oamaru in the last week say they were busy at the end of the year and busier still this year.

Upside to high $

The New Zealand dollar hit a post-float high of  82.62 US cents yesterday.

That makes exports traded in US currency more expensive but it also makes imports cheaper and the NZIER says it will help keep inflation down.

Inflationary pressures are building because businesses have seen their margins slimmed down and will want to recoup some ground when the economy picks up pace – likely to begin in 2012 as the rebuild of Christchurch gains pace, according to the institute Quarterly Predictions report.

“The RBNZ will need to raise rates next year towards 4% to offset these inflationary pressures,” NZIER principal economist Shamubeel Eaqub said in a statement. “A high NZD is helping to keep a lid on inflation for now. We expect the NZD to remain elevated for some time,” he said.

 Beef + Lamb New Zealand’s (B+LNZ) Economic Service’s report on movements in sheep and beef input prices showed a 4.1% increase in the year to the end of March this year, in contrast to a 2.9% decrease the previous year.

The increase has been driven by the price of fertiliser, fuel and increases in banking interest rates, says B+LNZ Economic Service Executive Director, Rob Davison.

 “The price rises for fertiliser and interest have a big impact given they are the largest areas of expenditure on sheep and beef farms.

If the higher dollar helps keep the price of fertiliser down and keeps a rein on inflation which in turn reduces the need for interest rate rises it will compensate for the currency’s impact on export prices.

Normally when the dollar is high farmers complain. There’s hardly been a whimper this time, and nor should there be. Commodity prices are still holding up and the higher dollar takes the pressure off the price of inputs like fuel, fertiliser and machinery.

The Fieldays open in a couple of weeks. They’re a barometer for farming confidence and exhibitors will be expecting to make good sales.