Increased demand a key driver, economist says
The New Zealand Institute of Economic Research (NZIER) Quarterly Survey of Business Opinion (QSBO) for January 2024 indicated a robust upturn in business confidence, reflecting a positive trajectory for the economy.
Despite a net 10% of firms expecting a deterioration in general economic conditions in the coming months (on a seasonally adjusted basis), this marks a substantial improvement from the net 49% in the previous quarter and the net 79% a year ago.
Increased demand is a key driver, with a net 6% of firms reporting a rise in their trading activity in the December quarter, and a similar proportion expressing positivity about demand in the next quarter.
Easing labour shortages
One of the notable shifts is the significant easing of labour shortages. Businesses reported improved ease in finding both skilled and unskilled labor, a stark contrast from a year ago when labour shortages were acute.
“Since the reopening of international borders, the strong increase in net migration inflows has helped alleviate labour shortages in New Zealand as firms can now bring in workers from overseas,” said Christina Leung (pictured above), NZIER principal economist.
The primary constraint for businesses has also shifted from labour-related issues to sales, with over half of the surveyed firms identifying sales as the primary constraint in the December quarter. Key concerns for businesses have shifted from supply-side factors to demand-side factors.
Mitigating cost and pricing pressures
Inflationary pressures seem to be subsiding, Leung noted, as indicated by declining reports of higher costs and reduced instances of firms increasing prices in the December quarter. This easing is most apparent in the building and service sectors.
“Overall, these developments suggest a continued moderation in inflation in the New Zealand economy over the coming year,” Leung said.
Retail sector sees a surge in optimism
The retail sector stood out with a remarkable shift in sentiment, with a net 44% of retailers expecting an improvement in general economic conditions. This is a significant turnaround from the previous quarter, showcasing the sector’s resilience in the face of higher mortgage repayments for households.
The building sector also exhibited optimism, particularly in commercial construction demand beyond 2024. The architects' assessment of work in their own office indicates a potential increase in commercial construction demand extending beyond 2024. Although cost pressures have alleviated for building sector firms, their pricing leverage has considerably diminished, posing ongoing challenges to their profit margins. These outcomes imply a sustained deceleration in construction cost inflation in the upcoming year.
In contrast, the manufacturing and services sectors remained somewhat downbeat, though less so compared to the previous quarter and a year ago. Both sectors showed signs of a recovery in demand, with varying impacts on cost and pricing pressures.
Upbeat business outlook fuels hiring and investment
Encouragingly, improved business confidence has translated into a more positive outlook for hiring and investment, with firms expressing cautious optimism about investing in plant and machinery.
“The history of the QSBO shows that firms tend to hold off on committing to investment ahead of general elections, given uncertainty over the outcome,” Leung said. “With a new government formed in late November 2023, it appears that firms are now looking to invest.”
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