The latest New Zealand Institute of Economic Research (NZIER) Quarterly Survey of Business Opinion (QSBO) indicates the post-election bounce in business confidence and activity seen in the final quarter of last year was short-lived. A net 24 percent of businesses in the March quarter expect a deterioration in the general economic outlook over the coming months on a seasonally adjusted basis.
Firms’ own trading activity was similarly sobering, with a net 23 percent of firms reporting a decline in activity over the March quarter. This is a marked turnaround from the net 7 percent of businesses which had reported increased activity in the previous quarter. Overall, the results point to higher interest rates having their intended effects in dampening demand to reduce inflation pressures in the New Zealand economy. Uncertainty over the new Government’s plans regarding spending and public sector cutbacks is likely adding to the caution amongst businesses.
The building sector is now the most downbeat
While the pessimism was pervasive across the sectors, the building sector was particularly downbeat. A net 54 percent of building sector firms expect a deterioration in the general economic outlook, a significant turnaround from the net 8 percent of firms in the sector expecting an improvement in the previous quarter. With demand across housing, commercial and Government construction still weak, this is reducing pricing power for firms in the sector. Against the backdrop of intensifying costs, the construction sector faced a further deterioration in profitability in the March quarter.
Meanwhile, a quarter of retailers are feeling pessimistic about general economic conditions over the coming months. This reflects the effects of headwinds facing the household sector. With over half of mortgages due for repricing over the coming year, many households are likely to rein in discretionary spending in the face of significantly higher mortgage repayments and the softening of the labour market.
Confidence has also fallen in the services sector, with a net 22 percent of firms expecting a deterioration in the general economic outlook. Services sector firms are reducing staff numbers in the face of weaker demand. Interestingly, there has been a turnaround in interest rate expectations, particularly amongst financial services sector firms. A net 20 percent of financial services sector firms expect higher interest rates in a year’s time.
Weak construction demand is likely to be weighing on domestic demand in the manufacturing sector. A net 12 percent of manufacturers are feeling pessimistic about general economic conditions, as weak demand reduces pricing power in the sector.
Businesses cautious about hiring and investment
Weaker demand and uncertainty over the new Government’s plans for spending and cutbacks are likely key contributors to firms’ caution towards hiring and investment. A net 11 percent of firms reduced staff numbers in the March quarter, although hiring intentions for the next quarter are marginally positive.
The emerging optimism firms had felt in the previous quarter towards investment appears to have dissipated. A net 14 percent of firms plan to reduce investment in plant and machinery over the coming year, while a net 8 percent plan to reduce investment in buildings.
Cost and pricing pressures continue to ease
The decline in cost and pricing indicators suggests a further easing in inflation in the New Zealand economy. Higher interest rates look to have their intended impact on dampening demand and reducing inflation pressures. We forecast annual CPI inflation to ease back towards the Reserve Bank’s 1 to 3 percent inflation target band in the second half of this year. This should give the central bank enough confidence to begin reducing the OCR next year.
*This article comes from the New Zealand Institute of Economic Research (NZIER). It has conducted the Quarterly Survey of Business Opinion since 1961, making it NZ’s longest-running business opinion survey. Every quarter NZIER asks about 4,300 firms about whether business conditions will deteriorate, stay the same, or improve.
15 Comments
Yes, there will need to be a modest drop of the OCR before end of the year, let's say a 25bps cut in November.
But dropping the OCR too early, and out of synch with the other Central Banks, will simply mean a fast depreciation of the NZ$, with consequent increase to inflation and subsequent re-increase to interest rates. Unfortunately, there is no free lunch. Even a real estate agent should be able to get it.
Only <24% of businesses expecting a deterioration... hiring is net positive.
Be interesting to know how what % expect an improvement in conditions.. and the big one is how many expect inflation to continue.
I would have predicted a larger number of businesses expecting a downturn, or hiring freeze/redundancies ... both surely will be needed to get inflation down.
I think no change in ocr until 2025 at the earliest... later if the 25% of businesses adjust and the rest keep cranking... protecting house prices from small drops hardly seems important in the context of 75% of business seeing the economy as stable or growing, and net positive hiring. In fact house price falls to make them more affordable would surely be a good thing for overall economic activity?
Bonus.
To date RBNZ has consistently been too much too sonn, too litle too late so consistently wrong as they fail to account for human reaction. At present the downturn in trade is self evident but we are in the gap period of the increase in mortgage costs/inflation and adjustment by consumers because decision are often made but not implemented immediately and same goes for decisions not to trade in the car/house, go on holiday etc. Patience will reveal all in time.
The key graph from the report was this one. 'Sales as a limiting factor' is a very good indicator of pending doom and recession. I am sick of saying the same thing (and I am sure people are sick of hearing it) but we started on this slippery slope in June 2022 and we will be deep into the doom loop this year unless there is a significant intervention.
The idea that this level of economic pain is necessary to 'tame inflation' is pure stupidity. Other countries are seeing the same inflation trends without the self-inflicted beatings. Crazy.
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