A net 27% of respondents to the ANZ Business Outlook survey expect weaker conditions in residential construction, while the employment outlook in the sector is now at a 10-year low too

Sentiment in the residential construction industry has plummeted again to a new 10-year low in the latest ANZ Business Outlook survey.

There was little obvious sign of any 'feelgood factor' emerging in the first of these surveys to be conducted since the Government torpedoed any plans for a Capital Gains Tax.

ANZ chief economist Sharon Zollner said the "main red flag" in the survey is residential building intentions.

"These fell sharply yet again. The signal is no longer isolated to this one data series – employment intentions in the construction sector also fell. The fall came despite the ruling out of a capital gains tax.”

The latest survey showed a net 27% of respondents expected weaker conditions in residential construction in the year ahead, which is a fresh 10-year low for the survey.

And the sentiment is spreading to employment intentions, which fell to their weakest level in the construction sector for 10 years also. Employment intentions in the construction sector fell from flat to a net 22% of firms intending to cut jobs.

"What to make of it? New Zealand needs more houses, but the construction sector is facing cash-flow and credit constraints," Zollner said.

"Despite the small sample, the data has been a pretty good indicator and suggests significant downside risk to the residential investment outlook."

Slightly brighter news was in the survey's "headline business confidence" figure, which lifted 6 points, with a net 32% of respondents reporting that they expect general business conditions to deteriorate in the year ahead.

Firms’ expectations for their own activity lifted 2 points to a net 9% expecting a lift. Other activity indicators were a mixed bag.

“Most ANZ Business Outlook activity indicators were little changed in May, at levels consistent with the slower growth the economy is experiencing,” Zollner said.

Here are some of the main points in the survey:

•      A net 3% of firms are expecting to lift investment, up 1 point.

•      Employment intentions fell 4 points to 0. Capacity utilisation rose 1 point.

•      Profit expectations rose 3 points to a net 10% expecting profit to decline.

•      A net 36% of firms expect it to be tougher to get credit, down 1 point.

•      Firms’ pricing intentions lifted 2 points to +29%. A net 50% of firms expect higher costs, led by agriculture. However, inflation expectations fell to 1.81%, the lowest since early 2017.

•      Residential construction intentions fell sharply again despite the ruling out of a capital gains tax. Employment intentions in the construction sector also fell sharply, to their lowest level since 2009.

•      Commercial construction intentions fell 12 points.

•      Export intentions fell 2 points.

“The economy has cooled considerably over the past couple of years," Zollner said.

"The ANZ Light Traffic Index suggests weakness will continue to mid-year. Beyond that, the lower exchange rate and interest rates should see momentum recover, assuming the global outlook and the terms of trade do not deteriorate. But how quickly the economy will bounce back is a key question.

“If the forward indicators start to suggest that the Reserve Bank’s relatively sharp V-shaped recovery is overly optimistic, it will be game on for further [Official Cash Rate] cuts this year.”