The New Zealand economy likely contracted in the June quarter as demand weakened and businesses laid off staff, the New Zealand Institute of Economic Research (NZIER) says.
A net 28% of firms in NZIER’s quarterly survey of business opinion (QSBO) reported a decline in trading activity during the past three months and 35% predicted conditions would worsen.
Christina Leung, the research firm’s deputy chief executive, said the survey data suggested there would be another quarter of economic contraction this year -- likely in the June quarter.
NZ’s gross domestic product increased 0.2% in the first three months of 2024, but the QSBO data released on Tuesday suggests the economy has not yet begun to recover.
A net 25% of firms reduced their headcount during the quarter, the highest proportion since the Global Financial Crisis in 2007, and another 10% expect to lay off staff next quarter.
This showed firms were “hunkering down in the face of weak demand,” Leung said.
Most firms now find both skilled and unskilled labour easy to find. This is a stark contrast from the pandemic era when there were severe shortages which helped drive the inflation spike.
During 2021 and 2022, a majority of firms reported the labour shortage was the biggest constraint on their trading activity. Now, a lack of sales is the limiting factor in activity for 61% of firms.
Leung said weak demand was driving a reduction in capacity pressures in the New Zealand economy, which would feed through to lower inflation.
“The easing in these indicators suggests higher interest rates are continue to gain traction in reining in inflation in the New Zealand economy”.
The firm has forecast inflation will be back in the 1% to 3% target band by the end of the year and return to the 2% Reserve Bank target midpoint in 12 months’ time.
Business confidence was weak across sectors but worst among building and construction firms. A net 65% of these firms expected conditions to worsen over the next three months and a net 34% had cut their prices during the past three months.
Across the entire survey, a net 23% of firms reported increasing prices during the quarter but that number has fallen dramatically from a net 70% a year ago. Profitability has come under further pressure, with 42% of firms reporting higher costs.
Many retailers have been unable to pass on these higher costs and a net 72% of these businesses reported reduced profitability. This is the situation the Reserve Bank has wanted to engineer through higher interest rates.
Leung said households would continue to pare back discretionary spending, and reject price increases where possible, as average mortgage rates peak and the labour market softens.
“We expect these factors will continue to weigh on consumer confidence and retail spending over the coming year,” she said.
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