Businesses gloomy about economic growth

Today's QSBO showed a net 5 per cent of firms are pessimistic about the general business situation. Photo / Northern Advocate
Today's QSBO showed a net 5 per cent of firms are pessimistic about the general business situation. Photo / Northern Advocate

New Zealand's economic growth is poised to slow in the second half of the year as local businesses got gloomier in the third quarter in a deteriorating trading environment, according to the New Zealand Institute of Economic Research.

The Wellington-based consultancy sees the pace of annual growth slowing to 1.5 per cent in the second half of the year from a pace of 2.6 per cent at the end of June, based on a more pessimistic outlook in the September quarterly survey of business opinion.

A net 5 per cent of firms were pessimistic about the general business situation, worse than a net 1 per cent in the June quarter, and a net 7 per cent experienced slower trading activity in the period, compared to a flat rate in the prior period.

"The recovery remains disappointing," principal economist Shamubeel Eaqub said in a statement. "Auckland is growing, but the post-quake surge in Canterbury is moderating and activity elsewhere is slowing."

New Zealand's economy grew 0.6 per cent in the June quarter on the strength of domestic milk production and increased building activity, following on from a 1 per cent pace of quarterly expansion in the first three months of the year.

Today's QSBO showed local manufacturing activity slowed sharply, with a net 26 per cent experiencing lower output from a net 3 per cent a quarter earlier, while services showed an unexpected deterioration, with a net 14 per cent decline in volume of services, from a net 2 per cent decline in the June period.

Eaqub said the manufacturing slowdown was probably due to the big build-up in inventories last year after strong climatic conditions stoked dairy production, though it wasn't limited to food producers and may reflecting a slowing Australian economy.

Labour conditions softened in the quarter, with a net minus 9 per cent in employment compared to a net minus 4 per cent, while hiring intentions were unchanged at net 4 per cent of firms expecting to take on new staff.

"Nothing feels particularly nice on the economic front - it doesn't look like we're heading into recession, but it doesn't look like the acceleration in the economy is going to continue," Eaqub said.

A net 15 per cent of financial services firms expect interest rates to rise in the coming year, turning around from a net 6 percent picking a cut.

Eaqub said he doesn't expect the Reserve Bank to move the 2.5 per cent official cash rate soon, and said it would take a major deterioration in the global economy to cut rates or signs of inflation starting to rise.

Inflationary pressures remained subdued, and consistent with the consumer price index staying in the middle of the central bank's target band of between 1 per cent and 3 per cent.

A net 21 per cent of firms experienced smaller profits compared to a net 13 per cent in the June quarter, though a net 3 per cent of companies are picking better earnings.

Building investment intentions were unchanged at a net minus 3 per cent in the quarter, while machinery and plant investment intentions deteriorated to a net minus 1 per cent from a net positive 2 per cent.

Retailing continued its gradual improvement, with a net 4 per cent experiencing better sales, compared to a net 2 per cent seeing smaller sales in the previous quarter. The bulk of those gains in the sector were in Auckland, Eaqub said.

ASB economist Daniel Smith said the bank had been expecting confidence "to rebound a little from Q2 due to the less volatile situation in Europe (the Q2 survey period included the tumultuous Greek elections). Still, confidence remains only just below the long-run average level."

The fact that confidence had not rebounded looked to have been influenced by experienced activity levels (the survey asks about both expected levels and those experienced over the last three months), said Smith.

"Overall, it seems more firms suffered from weaker trading conditions over the quarter. Interestingly, this looks to be a regional story, with Auckland activity holding up but other areas weak, especially Canterbury. That is surprising given that survey responses from Canterbury have been very strong in recent quarters and other indicators suggest that rebuilding work has been building momentum."

The past quarter in the building industry did appear "to have been surprisingly weak, with new orders and output both falling."

However, expectations of future activity had actually improved; expectations of new orders increased from 15 to 31 and output expectations are up from 17 to 25. Although construction work has yet to pick up materially, businesses remain confident that it will soon.

Business confidence had remained fairly soft, said Smith, although close to long-term averages and at a level consistent with modest GDP growth.

"Offsetting a slightly more stable situation in Europe, domestic activity over the last three months appears to have been quite soft, especially in Canterbury. The survey also suggests that building activity is yet to pick up noticeably, although expectations for future building work are high."

With inflation indicators largely unchanged, Smith said he expected the Reserve Bank to leave the Official Cash Rate on hold till at least June next year.


- BusinessDesk

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