Business sentiment plummets as Middle East conflict war dampens confidence

Business confidence has fallen sharply with 1% of companies expecting economic improvement, down from 39% in a previous survey. Photo / NZME

Business confidence has fallen sharply back to levels last seen in late 2024, with global geopolitical tensions weighing on firms’ expectations for the economy, according to the latest NZIER Quarterly Survey of Business Opinion.

The survey, conducted between March 6 and April 10, showed a net 1% of firms expect general economic conditions to improve in the coming months, down from a net 39% in the December quarter.

NZIER said confidence deteriorated as the survey period progressed, coinciding with an escalation in the conflict between the United States, Israel and Iran and renewed disruption to global supply chains.

Despite the fall in headline confidence, firms’ own trading activity was broadly flat in the March quarter on a seasonally adjusted basis, a slight improvement from the previous quarter when a net 3% of firms reported declining activity.

The building sector is the most pessimistic, while manufacturing remains optimistic because of robust international demand. Photo / 123rf

Businesses were also somewhat more optimistic about demand in the next quarter, suggesting domestic conditions have remained resilient despite the hit to confidence from global developments.

However, the overall survey results masked significant divergence across sectors.

The building sector was the most pessimistic, with a net 28% of construction firms expecting a deterioration in the general economic outlook.

NZIER said weaker construction demand contributed to the downbeat mood, with many firms also reporting declines in new orders and output over the March quarter.

In contrast, manufacturing was the most upbeat sector, with a net 34% of manufacturers expecting economic conditions to improve over the coming months.

NZIER said the stronger sentiment in manufacturing reflected robust international demand during the quarter.

That confidence is not feeding through into hiring or investment, however.

A net 9% of firms reduced staff numbers in the March quarter, while a net 5% expect to cut headcount again in the next quarter.

Investment intentions also softened, with a net 12% of firms planning to scale back investment in buildings over the coming year and a net 9% planning to reduce spending on plant and machinery.

NZIER principal economist Christina Leung said businesses were becoming more cautious, with geopolitical risks adding to existing uncertainty and potentially threatening the fragile recovery that had begun to emerge late last year.

Despite the recent surge in fuel prices, Leung said cost and pricing pressures remain broadly contained, as weak demand continues to limit firms’ ability to pass higher costs on to customers.

She said NZIER continues to expect the Reserve Bank to begin its tightening cycle in July, starting with a 25-basis-point increase in the Official Cash Rate, although the timing will depend on how inflation pressures evolve.

For now, inflation expectations among firms remain near the top of the Reserve Bank’s target band, at about 3%, suggesting inflation pressures are elevated but not accelerating.

- RNZ