The measure of firms’ own trading activity showed a net 23% of firms reported reduced activity in their own business in the June quarter.
In contrast, a net 18% of firms expected improved demand in the next quarter.
Although the sharp interest rate cuts since August last year have boosted confidence, the effects of lower interest rates remain slow to flow through to a lift in real activity, it said.
With demand remaining soft, firms continue to be cautious about hiring, NZIER said.
A net 12% of firms reduced staff numbers in the June quarter, although a net 4% expect to hire in the next quarter.
When it comes to investment plans for the coming year, a net 1% of firms intended to reduce investment in buildings, but a net 8% intended to increase investment in plant and machinery.
“While there is still some degree of caution among firms, there appear to be tentative signs of a pick-up in firms’ appetite to invest,” NZIER said.
Building sector downbeat
The building sector was the “least upbeat” sector surveyed.
Only a net 3% of building sector firms expect general economic conditions to improve in the coming months, a further drop from the 6% of building sector firms feeling upbeat in the March quarter.
This cautious mood in the building sector likely reflected continued weak construction demand.
A substantial proportion of building sector firms reported reduced new orders and output over the June quarter.
The retail sector remained the most optimistic, with a net 40% of retailers surveyed expecting better general economic conditions over the coming months.
Services sector firms are also feeling more positive about the general economic outlook ahead, despite continued weak demand.
“Again, this optimism is likely to be supported by the widespread expectations of lower interest rates over the coming year,” NZIER said.
“Despite this optimism, the services sector is still grappling with weak profitability as soft demand continues to weigh on the sector’s pricing power.”
Confidence in the manufacturing sector also lifted.
Softness in demand continued to drive a reduction in capacity pressures in the New Zealand economy, which is helping to contain inflation, NZIER said.
ASB, in a commentary on the QSBO, said sentiment measures will gradually improve over 2025 despite the volatile global scene that still runs the risk of weighing on New Zealand hiring and investment decisions.
“Supportive monetary policy settings will play a role,” ASB said.
“We have pencilled in a 25-basis-point Official Cash Rate cut in August and a 3% Official Cash Rate (OCR) end point, but note that the New Zealand outlook is highly uncertain with both upside and downside risks,” the bank said.
BNZ economists said the QSBO was “simply not weak enough” to give them confidence that the Reserve Bank would cut its cash rate at its July 9 meeting.
“We still think the case for doing so is strong but with the market pricing almost no chance of a cut, we do not believe the bank will pull the trigger,” BNZ said.
“We still think the cash rate needs to fall further, so are staying with our pick that it eventually troughs at 2.75%.”
Jamie Gray is an Auckland-based journalist, covering the financial markets, the primary sector and energy. He joined the Herald in 2011.
