But firms pessimistic about the year ahead
Business confidence has continued to recover from the all-time low levels last year, but the mood remains glum, with a period of below-trend growth expected for the New Zealand economy ahead, according to Kiwibank economists.
NZIER’s latest survey showed that a net 53% of businesses were expecting economic conditions to deteriorate over the coming months – a slight dip from the net 60% in the previous quarter.
Kiwibank’s Mary Jo Vergara, senior economist, and Sabrina Delgado (pictured above, left to right), economist, said the lift in confidence is encouraging and comes as the nation finally enters the disinflation phase and as confidence grows that the Reserve Bank is nearing the end of its hiking cycle.
“However, navigating the current economic environment is still a challenge. As NZIER noted, the mood among firms remains downbeat,” Vergara and Delgado said. “And despite the lift in confidence, activity indicators deteriorated a tad over the quarter.”
NZIER data showed a net 17% of firms reporting a decline in trading activity, an uptick from the net 15% the previous quarter. But firms remained downbeat for the period ahead, with a net 14% expecting economic conditions to worsen in the coming quarter, slightly up from the net 17% a quarter ago.
“There’s a clear correlation between firms’ trading activity and economic growth,” the Kiwibank economists said. “And with activity still running below the QSBO’s long-run average, a period of below trend growth lies ahead for the Kiwi economy.”
The latest data also showed a continued easing in capacity pressures. Capacity utilisation amongst builders and manufacturers has dropped considerably over the past year.
The search for labour, meanwhile, also improved markedly, driven by strong return of migrants. A net 7% of firms reported that it was easy to find unskilled labour; while just a net 8% of firms said it was difficult to find skilled labour, compared to a net 37% last quarter.
The Kiwibank economists said the improvement in both capacity utilisation and labour availability indicated a notable easing in capacity pressures in the economy, which was good news for domestic inflation.
“A capacity-constrained economy for the last two years created a breeding ground for inflation,” they said. “But the narrative is shifting. And as capacity pressures ease, downside risks to domestic inflation are building.
“An easing in capacity pressures is also being driven by a weakening in demand. The steep rise in interest rates is squeezing household incomes, and demand is slowing. Since the beginning of the year, sales have eclipsed labour as the main constraint for businesses. And over the September quarter, even more firms reported that sales are top of mind. Of the firms surveyed, almost half (48%) reported demand as their top constraint.”
Despite a downtrend broadly in play, cost pressures remained stubborn, with a net 68% of firms reporting a rise in cost pressures over the quarter. Pricing has eased, however, with a net 56% of firms increasing prices over the quarter – a significantly drop from last quarter’s net 70%. A net 46% of firms, meanwhile, are expecting to raise prices in the coming quarter. Weakening demand will likely see firms struggling to pass on higher costs by raising prices, which will ultimately impact profitability.
“Overall, the lift in confidence is encouraging, but it’s not all good news,” Vergara and Delgado said. “Other indicators in NZIER’s survey support our expectation for weak growth in the coming quarters.
“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.”
The Kiwibank economists don’t expect RBNZ to change its tune following the NZIER report.
“They’ll cheer the evidence of an easing in labour market capacity pressures but flag the inflationary risks of stubbornly high cost pressures,” they said. “Clear softening in demand, however, suggests that financial conditions are already tight, and no further tightening is needed. We expect the RBNZ will hold steady tomorrow.”
Mixed investment and hiring
Mounting fears of soft demand may be causing some caution around investment. But the idea that interest rates may have already peaked may have also slightly improved investment intentions.
“Last quarter, a net 27% of firms planned to pare back on building investments, but that’s now lowered to a net 24%,” the Kiwibank economists said.
“Meanwhile, only a net 15% of firms are paring back on plant and machinery investments plans, compared with last quarter’s 25% drawback. Overall, improvements in investment intentions were seen across the services, retailers, and manufacturers. But builders remain cautious, with 46% paring back on building investment plans. A big shift from the mere 3% pull back last quarter.”
When it comes to hiring, hiring intentions have softened due to easing capacity constraints and weakening demand.
“Over the quarter only a net 1.5% of firms (previously 3%) increased their headcount,” Vergara and Delgado said. “Though it seems this subdued hiring may be short-lived with a net 10% of firms eager to increase their headcount over the next quarter. But only across the services and manufacturing sectors as nearly 30% of builder’s and 20% of retailer firms look to downsize in the coming months.”
Read the INNER.KIWI article here.
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