The Middle East war has hit New Zealand business confidence hard, with NZIER's Quarterly Survey of Business Opinion for the March quarter showing just a net 1% of firms expecting an improvement in economic conditions in the coming months, down from a net 39% in the December quarter.
New Zealand Institute of Economic Research (NZIER) deputy chief executive Christina Leung said business confidence deteriorated as the weeks progressed, giving an idea of "how things were evolving over that survey period." The survey was conducted between March 6 and April 10.
"Although firms’ domestic trading activity remained stable in the March quarter, the ongoing US-Israel war against Iran poses a risk to the fragile recovery that had been taking shape in the New Zealand economy late last year," Leung said.
The survey shows just a a net 1 percent of firms expect better general economic conditions over the coming months on a seasonally adjusted basis. This is a big drop from the net 39 percent expecting a better general economic outlook in the December quarter.
"Firms’ own trading activity was flat on a seasonally adjusted basis, which is a slight improvement from the net 3 percent reporting a decline in activity in their own business in the previous quarter."
Building sector pessimistic
The building sector was most pessimistic given its exposure to global supply chain disruption and transport costs. Leung described the “perfect storm for the building sector” due to continued weak construction demand limiting ability to pass on high costs by raising prices.
That was seen in a sharp fall of building sector confidence fell sharply, with a net 28% of building sector firms feeling pessimistic “as costs surge and construction demand weakens further.”
“On investment, firms are feeling more cautious about investment in both buildings and plant and machinery, halting the recovery that had been emerging in the previous quarter.”
A net 12% of firms planned to cut back on investment in buildings over the coming year, while a net 9% plan to reduce plant and machinery.
Manufacturing remains the most upbeat sector, with a net 34 percent of manufacturers expecting an improvement in general economic conditions IN coming months.
"This optimism appears to have been supported in particular by stronger export demand in the March quarter, despite manufacturers reporting an easing in both cost and pricing pressures over the quarter, manufacturing sector profitability deteriorated," Leung said.
The retail sector also remains hopeful about the outlook and demand over coming months, with both new orders and sales improved in the March quarter.
"The proportion of retailers who raised prices increased in the March quarter, but the profitability of the retail sector was still weak, given the intense cost pressures."
In the service sector sentiment deteriorated, despite ongoing improvement in the volume of services.
"The reversal of the services sector’s confidence could be attributed to expectations of higher interest rates for the coming year," Leung said.
'Modest lift' in firms raising prices'
Inflation pressures appear contained for now, Leung said.
"The proportion of firms which faced higher costs remained steady at 37 percent in the March quarter, while the proportion of firms which raised prices picked up in the quarter. The building sector was the only sector to grapple with reduced pricing power and intensifying costs, given the weakening in construction demand and its exposure to global supply chain and fuel supply disruptions," she said.
Leung said costs and pricing indicators suggest inflation remains contained in the New Zealand economy despite the recent surge in fuel prices. But there's a lot of uncertainty about how long the war will impact gas and oil supply chains and prices.
The situation may not be currently “as worrying in terms of that pass through of high costs,” due to continued soft demand and limited ability for firms to pass on high costs by raising prices, said Leung.
ASB senior economist Jane Turner said pricing intentions lifted from net 25 in the December quarter to a net 43 in the March quarter, consistent with ASB's expectations for annual Consumers Price Index inflation to increase to around 4.5% to 5%.
Meanwhile, NZIER said expectations for interest rates turned around, with firms expecting higher interest rates in a year’s time.
On employment, “firms have also cut staff numbers and are planning to reduce headcount in the next quarter.”
“A net 9% of firms reduced staff numbers in the March quarter, and a net 5% plan to reduce headcount in the next quarter," NZIER said
Firms’ own domestic trading activity held up reasonably well despite the US-Israel conflict with Iran.
"Firms are feeling positive about demand in the next quarter”.
NZIER expects the Reserve Bank to start increasing the Official Cash Rate, currently at 2.25%, from July.
"Forward-looking inflation indicators, such as inflation expectations, will be a key influence on when this tightening cycle will begin," said Leung.
The NZIER has conducted its Quarterly Survey of Business Opinion, or QSBO, since 1961 making it New Zealand’s longest-running business opinion survey. Each quarter about 10,000 firms are asked whether business conditions will deteriorate, stay the same, or improve.
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