NZ business confidence drops on Labour policy concerns

The business community surveyed expects economic conditions to deteriorate in the first half of this year. Photo/File.

New Zealand firms turned pessimistic about the country's economic fortunes in the December quarter for the first time in more than two years, with the formation of a Labour-led government and its policy plans spooking businesses.

A seasonally adjusted net 11 percent of firms surveyed in the New Zealand Institute of Economic Research's quarterly survey of business opinion expect economic conditions to deteriorate in the first half of this year, turning negative for the first time since September 2015, and falling from a positive reading of 5 percent in the prior period.

The headline confidence reading is more pessimistic than firms' own trading with a net 10 percent experiencing increased activity in the December quarter and a net 18 percent anticipating more demand in the first three months of 2018. The decline in trading activity indicated slower economic growth although NZIER principal economist Christina Leung said it was more a moderation and she expects annual expansion of 3 percent.

"Business confidence had fallen in the previous quarter ahead of the general election, and it appears uncertainty over the new government policies have made businesses even more downbeat," Leung said in a statement. "Business may be worried about the outlook for the New Zealand economy under the new Labour-led government, but for now that is not reflected in demand in their own business."

The NZIER survey is a key metric of business sentiment watched by the Reserve Bank and typically tracks closely with the ANZ Business Outlook, which was at an eight-year low last month. Firms have become gloomier since the formation of the Labour-led government, with questions hanging over what impact its policies will have on industrial relations and how effective it will be reconfiguring the property market.

Leung said previous surveys show business confidence tends to drop when Labour takes office and increase when National is in charge, but that sentiment has a muted impact on actual trading activity.

The QSBO showed profitability continued to weaken in the December quarter, with a net 7 percent reporting lower earnings and a net 6 percent anticipating reduced profits in the coming quarter. That compares to a net 6 percent experiencing lower profits but a net 13 percent expecting increased earnings in the September survey.

Leung said the decline in expectations was a "worrying development" with fewer firms predicting conditions will recover in coming months. That increased uncertainty showed firms were more cautious about investment, she said.

The QSBO showed a net 2 percent of firms plan to invest in compared to 18 percent in September, while a net 10 percent plan to lift investment in plant and machinery, down from 17 percent, while hiring intentions declined to 12 percent from 19 percent.

Firms are still finding it hard to find labour, with a net 49 percent saying skilled labour was hard to find, deteriorating from 46 percent in September, and a net 31 percent finding it hard to attract unskilled labour, compared to a net 27 percent in the prior period.

Companies still expect to face cost pressures, with a net 38 percent anticipating an increase in costs compared to 24 percent in September, while experienced costs were largely unchanged with a net 29 percent reporting higher costs compared to 30 percent in the prior period. Pricing intentions increased with a net 31 percent expecting to lift prices in the coming quarter, up from 24 percent in September, while a net 18 percent raised prices in December, compared to 17 percent in the prior period.

-Business Desk