The latest NZIER Quarterly Survey of Business Opinion (QSBO) paints a very downbeat picture, with some 28% of businesses saying they expect to cut staff over the next quarter and 25% expecting weaker trading conditions. And the construction sector is the most pessimistic.
Principal economist Christina Leung said the net 37% of businesses that reported a decline in own trading activity during the June quarter just finished brings this measure to the lowest level since March 2009.
"This is not surprising, given the tight trading restrictions under Alert Level 4," she said.
"However, a net 25% of businesses also expect weaker demand in the next quarter. And although there was a slight improvement in headline business confidence, businesses remain pessimistic about general economic conditions over the coming months. Business confidence tends to soften heading into a general election, with businesses holding off on major spending decisions given uncertainty over the outcome. This quarter, the pre-election uncertainty is compounded by uncertainty over how the Covid-19 outbreak will play out."
And she said firms have become "even more cautious" and have pared back on headcount and business investment.
"A net 19% of businesses reduced staff numbers in the June quarter, and a net 28% expect to in the next quarter – the lowest level since March 2009. The New Zealand labour market has undergone some major changes, with firms reporting it is now easy to find staff – a sharp turnaround from the acute labour shortages reported in recent years. Fewer businesses also saw labour as the main constraint on growth."
ANZ senior economist Liz Kendall in commenting on the QSBO results said the impact of the Covid the crisis had become much more evident in realised (and expected) activity, hiring and investment.
"Some of these impacts will be dampened by lockdown effects and may improve in coming months. But forward-looking elements of today’s data and the pulse of the business psyche are consistent with our view that the outlook is grim; experiences and intentions will shape actions. Today’s data will be worrying for the RBNZ and Government; firms are reportedly hunkering down, shedding workers, and cutting prices. But more monetary stimulus is needed, and an aggressive, front-loaded approach is warranted."
NZIER's Leung said businesses are also planning to reduce investment, with a net 36% planning to reduce investment in both buildings and plant and machinery over the coming year.
Caution among businesses about investing in buildings is having a negative impact on the construction sector, she said.
"The construction sector is now the most pessimistic of the sectors surveyed in the QSBO, with a net 75% of building sector firms expecting a deterioration in economic conditions over the coming months. Even prior to the Covid-19 outbreak, commercial construction was facing headwinds with banks tightening up access to finance in preparation for increased capital requirements."
The subdued outlook for construction is reflected in architects’ measure of activity in their own office, with a particularly large decline in the commercial construction pipeline expected over the coming year.
Manufacturing sector firms also feel pessimistic, as weak demand puts downward pressure on prices and drives a further deterioration in profitability. Manufacturers reported a weakening in both domestic and export demand.
The retail sector was the exception to the overall trend of a moderation in cost pressures and firms cutting prices in the face of weaker demand. Retailers reported cost increases, likely reflecting the impact of social distancing and other operational requirements. However, retailers have been able to pass on increased costs by raising prices, despite weaker demand.
The services sector turned from one of the most pessimistic to the least pessimistic of the sectors surveyed. That said, a net 61% of services sector firms still expect a deterioration in economic conditions in the coming months. This was despite the expectation that interest rates would fall further over the coming year.