Construction of the new Wynyard Quayside project has reached level four. Photo / Sylvie Whinray
Construction of the new Wynyard Quayside project has reached level four. Photo / Sylvie Whinray
The post-election bounce in business confidence and activity in the final quarter of last year was short-lived, according to the latest NZIER Quarterly Survey of Business Opinion (QSBO).
The survey, released this morning, showed a net 24 per cent of businesses in the March quarter expect a deterioration in thegeneral economic outlook over the coming months on a seasonally adjusted basis.
Firms’ own trading activity was similarly sobering, said NZIER principal economist Christina Leung.
A net 23 per cent of firms reported a decline in activity over the March quarter. This was a marked turnaround from the net 7 per cent of businesses which had reported increased activity in the previous quarter.
“Overall, the results point to higher interest rates having their intended effects in dampening demand to reduce inflation pressures in the New Zealand economy,” Leung said. “Uncertainty over the new Government’s plans regarding spending and public sector cutbacks is likely adding to the caution amongst businesses.”
Pessimism was pervasive across the sectors, the survey found. But the building sector was particularly downbeat.
A net 54 per cent of building sector firms expect a deterioration in the general economic outlook, a significant turnaround from the net 8 per cent of firms in the sector expecting an improvement in the previous quarter.
“With demand across housing, commercial and Government construction still weak, this is reducing pricing power for firms in the sector,” Leung said.
“Against the backdrop of intensifying costs, the construction sector faced a further deterioration in profitability in the March quarter.”
Meanwhile, a quarter of retailers were feeling pessimistic about general economic conditions over the coming months.
“This reflects the effects of headwinds facing the household sector,” Leung said.
“With over half of mortgages due for repricing over the coming year, many households are likely to rein in discretionary spending in the face of significantly higher mortgage repayments and the softening of the labour market.”
Confidence had also fallen in the services sector, with a net 22 per cent of firms expecting a deterioration in the general economic outlook.
Services sector firms were reducing staff numbers in the face of weaker demand, Leung said.
“Interestingly, there has been a turnaround in interest rate expectations, particularly among financial services sector firms. A net 20 per cent of financial services sector firms expect higher interest rates in a year’s time.”
Weak construction demand was likely to be weighing on domestic demand in the manufacturing sector. A net 12 per cent of manufacturers were feeling pessimistic about general economic conditions, as weak demand reduces pricing power in the sector.
Leung said weaker demand and uncertainty over the new Government’s plans for spending and cutbacks were likely key contributors to firms’ caution towards hiring and investment.
Christina Leung is a principal economist with the New Zealand Institute of Economic Research. Photo / Mike Scott
A net 11 per cent of firms reduced staff numbers in the March quarter, although hiring intentions for the next quarter are marginally positive.
“The emerging optimism firms had felt in the previous quarter towards investment appears to have dissipated,” Leung said.
A net 14 per cent of firms plan to reduce investment in plant and machinery over the coming year, while a net 8 per cent plan to reduce investment in buildings.
Meanwhile, on the upside, cost and pricing pressures continued to ease.
“The decline in cost and pricing indicators suggests a further easing in inflation in the New Zealand economy,” Leung said.
“Higher interest rates look to have their intended impact on dampening demand and reducing inflation pressures. We forecast annual CPI inflation to ease back towards the Reserve Bank’s 1 to 3 per cent inflation target band in the second half of this year. This should give the central bank enough confidence to begin reducing the OCR next year.”
The survey provided “mixed messages” for the RBNZ, said Westpac senior economist Michael Gordon.
“On one hand, higher interest rates are clearly continuing to have a braking effect on activity,” he said.
“However, the fact that inflation is receding only slowly will remain a concern. We think the RBNZ will be looking for more reassurance from the upcoming CPI and labour market reports before they consider signalling an earlier start to OCR cuts.”
The RBNZ will tomorrow update its stance with a Monetary Policy Review.
There is now expectation that it will move the Official Cash Rate, with consensus of opinion suggesting it will be cut in November.
