Pricing intentions in NZIER’s quarterly survey are falling closer to the long-run average as demand weakens and firms let staff go

A survey of 10,000 business leaders suggests economic confidence is tumbling and bringing inflation indicators down with it, but not fast enough for some economists.  

The New Zealand Institute of Economic Research (NZIER) released its quarterly survey of business opinion (QSBO) on Tuesday morning. 

It showed a post-election bounce in business confidence and activity had vanished, with a net 24% now expecting the economy to deteriorate in the coming months. 

Businesses own activity was similarly negative with 23% experiencing a decline in activity during the first three months of the year. 

However, bad news for businesses can be good news for fighting inflation. Cost and pricing indicators in the survey showed inflation pressures continue to ease. 

Fewer businesses reported higher costs or increased prices in the March quarter. Some in the embattled construction sector went so far as to reduce their rates.

Christina Leung, NZIER’s deputy chief executive, said these developments suggested inflation would continue to moderate and return to the target band in the latter half of the year. 

“The downbeat mood reflects the headwinds that businesses face, including uncertainty over the new Government’s priorities, spending plans and cutbacks in the public sector, and the broader impact of higher interest rates on the New Zealand economy”. 

Weakening demand across sectors was leading firms to make fewer capital investments and reduce their staff numbers.  

“The softening in labour market conditions will also likely drive caution in the household sector and further weigh on retail spending. Retailers look to be bracing themselves for weaker demand and are reducing staff numbers accordingly”.

Not dead yet 

Despite the dour survey results, many bank economists still saw signs that inflation was not falling any faster than had already been forecast. 

A net 35% of firms increased their selling prices during the first quarter and 33% expect to do so next quarter. The long-run average for these metrics was 26% and 32%, respectively. 

Doug Steel, an economist at BNZ, said these metrics were consistent with an annual inflation rate of about 3% in the third quarter data — broadly in line with the bank’s forecasts. 

“While the survey was clearly of a disinflationary variety, it isn’t any more than we might have imagined overall so doesn’t fundamentally change our broad thoughts on the economy”.

The Reserve Bank’s monetary policy committee would have been in the process of finalising its policy decision for the April review when the QSBO was released. 

Steel said there would be plenty to discuss in the detail of the survey but nothing that would change the overall policy track. RBNZ expects to hold the official cash rate at 5.50% until 2025.

Michael Gordon, a senior economist at Westpac, had a similar view. He said the survey provided “mixed messages” for central bank policy makers. 

Higher interest rates were clearly having a braking effect on the economy but it was concerning that inflation was only receding slowly. 

“We think the RBNZ will be looking for more reassurance from the upcoming CPI and labour market reports before they consider signalling an earlier start to OCR cuts,” he said.

Beg to differ

Kiwibank’s economics team saw the survey in a more positive light. They said the fact that fewer firms were raising prices was “great news” for the inflation outlook. 

“What’s even better is the shrinking proportion of firms looking to increase prices over the coming quarter, from a net 36% to a net 32%,” they wrote in a note.

This kind of report was what the RBNZ’s committee would want to see one day before releasing a policy decision, as it showed demand was cooling. 

“The easing in cost and pricing intentions also point to continued disinflation and a weakening in hiring intentions points to growing slack in the labour market. Heat is leaving the economy”.