Rising optimism for New Zealand economy greeted with caution

Business confidence in New Zealand's economy picked up in the last quarter, but analysts say the outlook is still too fragile to suggest sustained growth.

The New Zealand Institute of Economic Research (NZIER) Quarterly Survey of Business Opinion, out Tuesday, showed business confidence rebounded in the last quarter of 2015, following a sharp drop in the previous quarter.

A net 13 percent of businesses expected the economy to strengthen in coming months, as demand had picked up across all sectors, suggesting "solid growth" in the first half of this year, said an NZIER statement.

Strengthening demand was supporting expansion and recruitment plans, but firms were also reporting increased difficulty in finding skilled labor as well as more caution in regard to investing, particularly in buildings.

With activity picking up, there were signs of renewed capacity pressures in the economy, but inflation pressures remained weak, which weighed on profitability.

The NZIER said it expected the Reserve Bank of New Zealand (RBNZ) to keep the interest rate on hold over 2016 in the face of solid economic growth, despite subdued inflation.

An economic note from the ASB Bank said it expected the lift in inflation pressures would be transitory, as they reflected the fall in the New Zealand dollar over the second half of 2015.

The RBNZ would be encouraged by the direction of the survey results, but would be looking for further lifts over the first half of 2016 to be consistent with its inflation forecasts, said the ASB.

"It remains our view that the RBNZ is likely to be disappointed on this front, with confidence and pricing intentions likely to hold at current levels," it said.

"We continue to expect a subdued inflation outlook will prompt two further 25-basis-point OCR (official cash rate) cuts in June and August this year." Enditem