Business confidence drops to four-year low as economic outlook worries firms

The survey showed a net 63 percent of firms in the financial services sector expected lower interest rates. Photo / AP

New Zealand business confidence extended its decline in the third quarter, plunging to its lowest level in more than four years, with local firms now expecting conditions to deteriorate in a tougher economic climate.

A net 9 percent of firms in the New Zealand Institute of Economic Research's quarterly survey of business opinion predict general business conditions to get worse, sliding from an optimistic reading of 5 percent three months earlier, and the lowest reading since March 2011.

However the outlook for their own activity remained upbeat, with a net 17 percent of firms expecting improved trading in the coming quarter, up from the June quarter's reading of 13 percent.

A sustained drop in dairy prices, forecasts for dry weather, and an absence of inflation saw the Reserve Bank lower the official cash rate three times this year, from 3.5 percent to 2.75 percent, and prompted economists to downgrade their outlook for economic growth. Adding to that, concerns about a stuttering Chinese economy and how that will flow through to demand for commodities added to uncertainty.

"The drought and the slowing growth in China and the potential impact on the New Zealand economy - that has made a lot of business uneasy about what's going to be happening in the New Zealand economy in the coming months, but as yet they haven't seen the effects in their business," NZIER senior economist Christina Leung said. "Despite concerns over the broader outlook, businesses are still looking to hire and invest in plant and machinery."

Leung noted weakness in inflation, with a net 6 percent of business cutting prices in the quarter, the lowest reading since June 1999, sliding from a net 1 percent of firms raising prices in the prior period.

NZIER expects a fourth interest rate cut this year. Leung said the central bank would keep rates steady at the October monetary policy announcement, but would lower the key rate again before the end of the year.

"The question is, are we in an emergency environment that warrants emergency of settings at 2.5 percent," Leung said. "They'll want some ammunition. Are we in an environment that was as dire when we were at 2.5 percent?"

The survey showed a net 63 percent of firms in the financial services sector expected lower interest rates, up from 25 percent in the June quarter.

A net 3 percent of firms expect reduced profit, a small improvement from a net 4 percent three months earlier, as a weaker dollar increased costs and squeezed margins. In the coming quarter a net 11 percent predict better profitability as they pass on costs, a turnaround from last quarter's reading, where a net 2 percent expected reduced profitability.

A net 19 percent of firms reported an increase in costs in the September quarter, up from a net 17 percent of firms in the June quarter.

The question is, are we in an emergency environment that warrants emergency of settings at 2.5 percent.

Hiring intentions improved with a net 15 percent intending to take on more staff in the quarter, up from a net 10 percent. It was also becoming easier for firms to find skilled staff, with a net 23 percent of respondents finding it difficult to find labour, an improvement from the previous quarter's net reading of 30 percent. A net 3 percent of firms found it difficult to find unskilled labour, compared to a net 10 percent the prior quarter.

Retailers are more optimistic about their sales outlook, with a net 7 percent of firm expecting improved sales, from the previous quarter's pessimistic outlook. A net 10 percent expected sales to improve over the next six months, up from a net 2 percent.
Manufacturers reported improving conditions with a net 8 percent reporting increased exports, up from a net 4 percent, however domestic demand remained weak.

Business confidence dropped sharply in the construction sector, with a net 8 percent of firms not reporting any new orders.

A net 30 percent of service firms surveyed expected higher volume in the coming quarter, up from a net 14 percent, although increased competition weighed on profitability, with a net 10 percent expecting to cut prices in the coming quarter.