Brief lull in Middle East war pushed up business confidence

Business confidence partly rebounds during Middle East peace hopes - before latest hostilities

Net 12 percent expect economic improvement vs +1 pct in March survey

Businesses report flat demand and expect little improvement next quarter

Further RBNZ rate rises expected

Inflation pressures stronger, weaker profit expectations, investment and hiring caution

Business confidence partly recovered during the lull in Middle East hostilities, but uncertainty continues to weigh on firms' expectations for the economy, according to the latest NZ Institute of Economic Research's (NZIER) Quarterly Survey of Business Opinion (QSBO).

The survey, conducted between early June and July, showed just a net 12 percent of firms expect general economic conditions to improve in coming months compared to a net 1 percent in the March quarter.

"This recent easing of the fuel crisis appeared to have supported an improvement in confidence in the June quarter."

However, principal economist Christina Leung said the resumption of hostilities in recent days was likely to lead to "some unwinding" of the lift in sentiment.

Firms' own trading activity was a shade firmer in the quarter, with a net 1 percent reporting better business from zero in the previous quarter.

Businesses were slightly less optimistic about demand in the next quarter, with 10 percent expecting better trading from 13 percent in the March survey.

Wide split between sectors

The building sector remained the most pessimistic, with a net 6 percent expecting a deterioration in the general economic outlook>

NZIER said weaker construction demand was driving the downbeat mood, with firms also reporting that the lack of demand was putting downward pressure on prices.

In contrast, retailers were the most upbeat, as new orders and sales improved.

However, previous strong sentiment in manufacturing had declined and overall it was now neutral amid increased uncertainty.

Inflation pressures stronger

Leung said the survey suggested a strengthening of inflation pressures.

Firms reporting higher costs rose to 54 percent from 37 percent, while those expecting to increase prices increased to 54 percent from 43 percent.

"Overall, these results suggest a heightened risk of high inflation persisting in the New Zealand economy," Leung said.

The survey showed firms continued to shed staff, and were still finding it difficult to find skilled staff.

Investment intentions improved but still remained marginally negative, while profit expectations deteriorated.

Leung said taken all together the survey suggested a small contraction in the economy over the quarter.

She said firms also expected further Reserve Bank rate rises this year.