Covid-era travel restrictions saw businesses struggle to find the right staff. This enabled employees to bargain for higher wages, which helped push inflation up.
Now that moving people and goods around the world has become easier, firms are much less worried about labour shortages.
Rather, the biggest hurdle they face is securing sales. Over half of firms surveyed by the NZIER reported sales being the primary constraint on their businesses in the December quarter.
The Reserve Bank’s aggressive interest rate hikes, aimed at cooling inflation, are having their intended effect. They’re reducing the amount of disposable income people have to spend and businesses have to invest. This is slowing economic demand and cooling economic growth.
The silver lining for businesses (but downside for the RBNZ’s inflation fight) is that a rebound in the tourism sector, as well as record-high immigration, are keeping businesses’ sales buoyed.
The NZIER noted the retail sector changed its tune in the December quarter, with a net 44 per cent expecting an improvement in general economic conditions. In the September quarter, retail was the most downbeat sector.
“While this shift is surprising given the signs of a slowing in retail spending as many households now face significantly higher mortgage repayments, the strong migration-led population growth and a recovery in tourism are likely to support demand in the retail sector,” the NZIER noted.
The Reserve Bank has voiced its concerns around strong immigration stimulating the economy at a time it’s trying to cool things down to lower inflation.
Nonetheless, the portion of businesses surveyed as a part of the QSBO that said they’d put their prices up declined in the December quarter, suggesting a “continued moderation” in inflation over the coming year, according to the NZIER.
The easing in inflation pressures was most apparent among building and service businesses.
The NZIER noted building sector firms’ pricing power had also reduced considerably, which weighed on their profit margins.
“These results suggest a continued slowing in construction cost inflation in coming years.”
The manufacturing sector continued to have a tough time in the December quarter, with cost and pricing pressures rising. It was also a standout sector in the survey for not feeling positive about hiring new staff.
The services sector, on the other hand, experienced eased cost and pricing pressures.
The NZIER noted businesses generally remained slightly cautious about investing in buildings but slightly positive 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,” it said.
“With a new Government formed in late-November 2023, it appears that firms are now looking to invest.”
Jenée Tibshraeny is the Herald’s Wellington business editor, based in the parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.
