Optimism fades as firms face weak demand
The latest NZIER Quarterly Survey of Business Opinion (QSBO) shows business confidence slipping in the September quarter, with only a net 15% of firms expecting economic improvement – down from 26% in June.
While sentiment remains positive overall, actual trading activity fell short, with a net 14% of firms reporting a decline in their own business.
Weak demand remains the key constraint, with a net 63% of firms citing a lack of sales as their main challenge. In contrast, just 3% reported labour shortages as a major issue, suggesting growing spare capacity in the labour market.
Investment and hiring intentions also declined, with a net 23% of firms cutting staff and 13% planning to reduce investment in machinery. As NZIER noted, “The continued disappointing nature of the recovery in demand, combined with the volatile global backdrop, is driving heightened caution among firms.”
Sector breakdown: manufacturing hit hardest
Manufacturers were the least optimistic, with only a net 3% expecting better economic conditions ahead. Export demand remains in contraction, and profitability weakened despite price increases. NZIER attributed this to “the weaker global growth outlook… presenting a key headwind for the manufacturing sector.”
The building sector also remains under pressure, with declines in new orders and output. Architects’ workloads point to “a flat pipeline of housing construction work” and reduced commercial and government projects.
Retailers, while still the most optimistic group, also reported weaker new orders and reduced staffing. The services sector showed a similar contrast between positive expectations and soft current demand, with optimism buoyed by expectations of lower interest rates over the next year.
Inflation pressures re-emerge
Pricing indicators suggest a lift in inflation pressures, with a net 11% of firms raising prices in the quarter – a turnaround from 1% who cut prices in June. However, this trend wasn’t uniform: building firms’ pricing power fell, with 20% cutting prices.
NZIER expects inflation to stay just above 3% in coming quarters before easing back toward the RBNZ’s 2% midpoint as spare capacity persists.
“We continue to forecast two further 25-basis-point OCR cuts from the RBNZ at the upcoming meetings in October and November,” NZIER said.
ASB: “The economy may have turned a corner, but the wheels are spinning in the mud”
ASB senior economist Jane Turner (pictured left) said confidence had “stalled in the September quarter, as the recovery in economic demand remains underwhelming.” Despite some signs of a turning point, Turner noted the economy was “treading water rather than the much-awaited increase in demand.”
Employment and investment plans have retrenched, and inflation indicators remain subdued. Turner warned that while headline CPI remains near the top of the RBNZ’s target band, “underlying domestic inflation pressures are subdued.”
ASB said the RBNZ needs to move faster and deliver a 50-basis-point cut at this week’s meeting, warning that delaying stimulus risks making it too late to help households and businesses.
Kiwibank: “Businesses remain in a difficult situation”
Kiwibank economists Mary Jo Vergara and Sabrina Delgado (pictured centre and right) echoed the sentiment, saying business confidence “is waning because the expected recovery in demand has disappointed.”
They said the latest QSBO results “support a 50bps cut to the cash rate,” citing weak activity, a sharp fall in investment intentions, and rising job cuts.
“Why invest and expand when you’re worried about demand, revenue, and profitability? That’s what we’ve heard from Kiwi businesses across the country,” Vergara and Delgado said.
Across all sectors, 40% of firms reported lower profits, and only 11% lifted prices.
“Businesses remain in a difficult situation. They’re having to gut costs when and where they can in the face of ongoing pressure on profitability,” the Kiwibank economists said.
Outlook: pressure builds for RBNZ to act
With confidence weakening and labour market slack increasing, economists agree the RBNZ faces growing pressure to cut the official cash rate more decisively.
Both ASB and Kiwibank expect a 50bps cut in October, with further easing likely in November, as New Zealand’s “re-recovery” struggles to gain traction.
For more insights, read the report from NZIER, ASB, and Kiwibank.
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