But a period of weak growth looms over the Kiwi economy
Business confidence has seen a slight uptick over the June quarter, but remained in recessionary territory, NZIER’s quarterly survey of business opinion (QSBO) showed, with Kiwibank economists predicting a period of weak growth for the Kiwi economy.
The survey showed that a net 59% of firms are now expecting economic conditions to deteriorate, down from a net 63% from the previous quarter.
“While business confidence has recovered from hitting an all-time low last year, it remains in recessionary territory. And despite a slight improvement in confidence, measures of activity worsened,” said Kiwibank’s Sabrina Delgado (pictured above left), economist, and Mary Jo Vergara (pictured above right), senior economist.
Meanwhile, a net 17% of firms were now expecting domestic trading activity to weaken, compared to a net 8% last quarter.
“There’s a clear correlation between firms’ trading activity and economic growth,” Delgado and Vergara said. “And with activity running well below the QSBO’s long-run average, a period of below trend growth lies ahead for the Kiwi economy.”
NZIER’s latest survey also noted a considerable softening in capacity pressures.
“First, rising net migration is helping to boost capacity,” the economists said. “Labour shortages have long-hampered firms’ activity and profitability. But the return of migrants is helping to plug those staffing gaps.”
A net 37% of firms reported difficulty in finding skilled staff, a much better read than the net 44% last quarter; while a net 11% of firms said they found it tough to find unskilled staff, far smaller than the net 37% last quarter, and the smallest proportion since mid-2020.
“Capacity pressures are also easing as demand is weakening,” the economists said. “The unprecedented rise in interest rates is starting to bite, and demand is slowing. The last quarter saw sales eclipse the search for labour as the main constraint for businesses. And today’s report confirmed that sales are still top of mind for businesses.”
A net 42.2% of firms viewed demand as their top constraint, slightly more than the 40.9% last quarter, the survey found.
A bright spot in the report, the Kiwibank economists noted, was the continued cooling in costs, with both experienced and expected cost readings falling. Over the June quarter, a net 67% of firms reported rising costs shrunk, down from 68.3% in Q1.
“We would expect to see further easing in cost pressures in the coming quarters,” the economists said. “Wages are a major driver of firms’ total costs. And wages have been pushed higher by the scarcity of labour. But as labour shortages are resolved, that should provide firms with relief on the cost front. And that suggests weaker pricing intentions, which is good news for inflation.”
Indeed, the proportion of firms planning to raise their prices in the coming quarter fell from 60% to 48%, as demand wanes.
“Overall, the lift in confidence over the June quarter is nothing to write home about,” Delgado and Vergara said. “Other indicators in NZIER’s survey support our expectation for weak growth in the year ahead.
“The unprecedented rise in interest rates is weighing on household consumption and business investment. That’s not an environment conducive for growth. But a slowdown in activity is needed to rebalance our economy and return inflation to target.”
Kiwibank said it expects RBNZ to continue to hold the cash rate at 5.5% next week, and for the rest of the year.
“The economic pendulum is clearly swinging towards downside risks, rather than upside risks, the economists said.
Cautious about investment
Delgado and Vergara said firms remained cautious about investment amid an environment of softening demand.
“And the general consensus that the current climate is not ideal for expanding business remains,” they said.
NZIER’s latest data showed a significant decline in investment intentions. A net 27% of firms were paring back on building investment plans, while a net 26% were paring back on plant and machinery investment plans, “reflecting a picture of subdued near-term growth expectations,” the economists said.
The June quarter has continued to demonstrate robust hiring with a net 3% of firms increasing their headcount – this despite softening demand and drawbacks in investment. Kiwibank economists said that, and a net 5% planning to lift their staff numbers in the next quarter, were likely a function of a migration-led boost to labour supply.
They expected the forecast recession, however, to drive a loosening in the labour market, despite the surge in net migration and the expansion in the talent pool.
“As consumer demand cools, so too will firms’ demand for labour,” Delgado and Vergara said. “If firms are expecting to pump out less output, then an extra pair of hands may prove unnecessary, and instead too costly.”
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