“Worst of all worlds” – this is how BNZ head of research Stephen Toplis is characterising the latest business confidence survey results.
Toplis fears businesses expect their own activity to fall off a cliff, while they continue to try to pass on higher costs to customers.
“It’s all starting to look like stagflation on steroids,” he said.
“There is no sign inflation is abating in any meaningful way, yet the survey adds more weight to our long-held argument that the economy is headed for recession. Moreover, that recession could come faster, and be much deeper, than many care to believe.”
A net 73 per cent of businesses surveyed by the New Zealand Institute of Economic Research (NZIER) between November 28 and January 9 saw general economic conditions deteriorating.
This was the weakest reading in the quarterly survey’s history.
While the survey results suggested businesses were bracing for tough times, their starting point wasn’t atrocious. A net 13 per cent of respondents reported a decline in activity over the prior quarter.
But concerningly, a net 33 per cent of businesses expected their own trading activity to decline in the next quarter.
Businesses said staff shortages remained acute, with their search for labour continuing to be their main constraint. A net 68 per cent of respondents said skilled labour was hard to find.
But on the flipside, businesses said they were becoming more cautious, with a net 9 per cent looking to reduce staff numbers and a net 28 per cent were looking to pare back investment on plant and equipment.
A growing portion also started to report sales as the primary constraint for their businesses, suggesting weakening demand starting to impact more businesses.
Businesses said rising costs were hampering their profitability, even though they were passing some of these costs on to customers by hiking prices.
A net 44 per cent reported lower profits in the prior quarter. A net 55 per cent expected profit downgrades in the next quarter.
A net 80 per cent of respondents saw costs rising, while a net 71 per cent expected to hike prices. These portions were similar to what businesses experienced in the previous quarter.
Nonetheless, Toplis believed waning activity would eventually dampen inflation.
Will RBNZ take a hike?
Accordingly, he believed the Reserve Bank didn’t need to hike the official cash rate (OCR) by 75 basis points, as expected, to 5 per cent at its next review on February 22.
Toplis said he understood the importance of looking at data that shows actual activity, but said leading indicators, such as business survey results, “are so weak that the Reserve Bank should now be moderating its approach”.
He said markets were pricing in a 50-50 chance of a 75-point OCR hike, versus a 50-point one.
“If ongoing negative anecdotes, further weakness in the housing market, and a lower-than-forecast CPI [consumer price index] eventuate (as we expect) then market pricing could well write off a 75 point move altogether,” Toplis said.
Kiwibank economists said businesses had been spooked by the Reserve Bank’s hawkish November statement, in which it forecast more aggressive OCR lifts than previously anticipated.
Accordingly, they believed a 25-point hike in February would be enough.
Meanwhile, ANZ senior economist Miles Workman and Westpac senior economist Satish Ranchhod stuck to their views, a 75-point hike was warranted.
“The big worry in these data is the fact that costs and pricing lifted for both the past quarter (Q4) and the next (Q1),” Workman said.
“That’s going the wrong way, and suggests near-term inflation pressures remain acute (and far too high for the Reserve Bank to call these data ‘comforting’).”
Workman believed the Reserve Bank would want to see an actual slowdown in economic activity, before slowing its interest rate hikes.
“It’s early days,” he said.
“Clearly, businesses are very worried about the future state of demand for their goods and services, and they are, logically, expecting to ease back on investment and headcount in response.
“But there is still scope for economic resilience to surprise, as has been the general theme for some time (years!) now.”
Ranchhod said: “Before we get too pessimistic, we do need to put this result in some context. The New Zealand economy has been running hot over the past year.
“Even with the softening that we’re now seeing, businesses are still reporting firm levels of demand, stretched capacity and ongoing difficulties finding labour.”
He said the survey results don’t show the economy is coming to a “screeching halt”.
“Rather, some of the steam that built up over the past year is now dissipating.
“The Reserve Bank has been hiking interest rates for over a year now in order to moderate demand and dampen the inflation pressures that have been running red-hot for an extended period.
So in some sense, the softening in economic activity could be welcome news for the central bank.
“However, it’s clear that there is still a lot of work for the Reserve Bank to do.”
As for the survey result’s impact on shares, Harbour Asset Management portfolio manager Shane Solly said the weak results were a “warning signal for earnings expectations for more cyclical New Zealand stocks”.
Coming back to the survey’s details, builders and retailers were the most downbeat.
A net 77 per cent of firms in the building sector expected economic conditions to worsen.
“The pipeline of housing and commercial construction for the coming year continues to decline, while that for Government construction work has moderated,” the NZIER said.
“These results suggest construction activity, especially residential construction, will start to ease over the second half of 2023 …
“While most building sector firms still reported intense cost pressures, the proportion of firms that increased prices continued to fall in the December quarter.”
As for retail, a net 76 per cent of retailers expected a deterioration in economic conditions.
Weaker demand is limiting their abilities to hike prices.
The NZIER noted almost half of mortgages are due for repricing over the coming year, meaning many mortgages will be rolling off historically low fixed-term rates of around 2 to 3 per cent onto significantly higher rates of 6 to 7 per cent.
This should drive slower retail spending over the coming year.