NZ business confidence knocked by pre-election jitters in third quarter

New Zealand firms' optimism about the economy fell in the September quarter on pre-election jitters, but companies still expect better times ahead.

A seasonally adjusted net 7 per cent of firms surveyed in the New Zealand Institute of Economic Research's quarterly survey of business opinion anticipate better economic conditions in the coming year versus 17 per cent in the June quarter.

"A decline in business confidence is not unusual heading into a general election, as businesses and households hold off committing to major spending plans given the uncertainty over the formation of the new government," said NZIER's principal economist Christina Leung.

The incumbent National Party and the Labour-Green bloc are currently in talks with New Zealand First leader Winston Peters to form a government after there was no outright winner in the September election. Peters has said he will not make a decision before all votes are counted, something which is expected to take place by October 7.

NZIER's Leung said the decline in confidence "does tend to be temporary" but will depend on how long it takes to form the new government and what that government eventually looks like. She also noted the decline in business confidence ahead of this election was less severe than before other elections. On average, the pre-election fall in confidence has been 19 percentage points, she said.

There was a decline in business confidence in most regions, although Northland a notable exception, which she said may have been "buoyed by election campaign promises of major spending on infrastructure in the region."

A seasonally adjusted net 13 per cent of firms surveyed experienced stronger trading in the three months to September versus 17 per cent in the June quarter. However, in terms of expected activity, a seasonally adjusted 27 per cent predict an improvement versus 24 per cent in the June quarter.

Firms experienced a fall in earnings with 6 per cent showing worse profitability in the September quarter, compared with 1 per cent that saw worse profitability in the June quarter. Looking ahead, however, 13 per cent expect better profitability in the coming quarter, versus 6 per cent in the prior quarter.

There was a further drop in confidence in the building sector, which fell to 3 per cent in the September quarter from 18 per cent in the June quarter and 31 per cent in the March quarter. NZIER noted that June quarter gross domestic product data showed another contraction in construction and "indicators suggest further softening in construction activity is likely in the near term."

The services sector also saw a decline in confidence, falling to 2 per cent in the September quarter from 20 per cent in the June quarter. It was largely driven by weaker demand in the financial services sector which also reflected slowing property market activity, said Leung.

Firms continued to struggle to find labour in the September quarter with a net 46 per cent saying it was hard to find skilled workers and a net 27 per cent struggling with unskilled staff, compared to 47 per cent for skilled hires and 23 per cent for unskilled in June.

However, a net 14 per cent of firms took on more staff in the September period and a net 19 per cent expect to hire in the coming three months, versus 13 per cent and 12 per cent in June.

Capacity utilisation was 91.3 per cent from 92.1 per cent in June, driven by lower utilisation across all sectors.

Despite the weaker confidence, investment intentions are "solid" with a rebound in investment plans for buildings, said Leung. Firms lifted their investment intentions for buildings with a net 18 per cent expecting to invest in the coming year versus a net 3 per cent in the June quarter. A net 17 per cent expect to invest in plant and machinery compared to 20 per cent in June.

Costs remained a concern for firms, with a net 30 per cent experiencing higher costs in September compared to 26 per cent in June.

Regarding interest rates, a net 39 per cent expect a hike compared to 38 per cent in the June quarter.

Against a backdrop of a further easing in capacity utilisation and steady pricing indicators, Leung said there is "little urgency" for the central bank to begin lifting rates and she expects the official cash rate to remain on hold until "at least" late 2018.