Business confidence recovers on back of strong demand for construction, according to NZIER's latest quarterly survey

Business confidence improved in the final three months of 2020, according to the latest New Zealand Institute of Economic Research (NZIER) Quarterly Survey of Business Opinion.

A net 16% of businesses expected a deterioration in general economic conditions over the coming months, on a seasonally adjusted basis - lower than the 38% in the previous quarter, and well below the 68% of businesses feeling pessimistic in March 2020.

When it came to firms’ own trading activity, a net 1% reported reduced demand on a seasonally adjusted basis.

The NZIER’s quarterly survey results reflect more pessimism than ANZ’s monthly Business Outlook Survey results.

According to ANZ, there were more optimistic businesses than there were pessimistic businesses in December, when it came to both the wider economy and their own activity. It was the first time since before Labour came into government in 2017 that optimism gazumped pessimism according to these results.

The NZIER said its survey results suggested a rebound in annual Gross Domestic Product (GDP) growth to around 2% at the end of 2020.

“The building sector remains the most optimistic of the sectors surveyed, as strong construction demand supports a lift in confidence,” it said

“With the pipeline of residential, non-residential and government construction work increasing, building sector firms are hiring to keep up with demand. The rebound in construction activity is driving capacity utilisation in the sector to record highs.

“Although sentiment in the other sectors has improved, businesses are generally still cautious about general economic conditions ahead.

“Demand has improved in most of the other sectors, but firms are still finding it difficult to pass on rising costs by raising prices. This is weighing on firm profitability.

“Despite weak profitability, increased certainty about the outlook is encouraging businesses to hire and invest.

“A net 15% of firms are planning to increase headcount in the next quarter, while a net 10% of firms are looking to invest in plant and machinery. These results indicate a recovery in employment and business investment over 2021.

“As employment demand improves, labour shortages are becoming more acute. This is particularly the case for skilled labour, with a net 43% reporting difficulty in finding skilled labour – close to levels seen in early 2020.

“The strong rebound in construction demand has underpinned a surge in capacity pressures in the building sector, with capacity utilisation rising to record highs. This increase in capacity pressures should support a lift in wider inflation pressures later in 2021.”