New Zealand firms still hopeful about an improvement in the economy despite demand remaining weak - latest NZIER Quarterly Survey of Business Opinion

New Zealand firms remain optimistic about the economy despite continuing weak demand, according to the latest survey by the New Zealand Institute of Economic Research (NZIER). 

The latest NZIER Quarterly Survey of Business Opinion (QSBO) found weak activity was widespread across sectors – with recovery not living up to expectations. But although businesses reported a net 23% decline in activity, a net 27% of firms expect general economic conditions to improve.

The long-running QSBO (since 1961) is closely watched by the Reserve Bank (RBNZ) and Tuesday's survey release is pivotal coming ahead of the next review of the Official Cash Rate (OCR) on July 9. The RBNZ is charged with keeping inflation in a 1% to 3% range, and it explicitly targets 2% inflation. With inflation having moved within the 1% to 3% range again last year, the RBNZ has been reducing the OCR, from 5.5% last August to the current 3.25%. 

But financial market pricing currently suggests there will be a 'pause' in the cuts next week.

BNZ head of research Stephen Toplis said the QSBO "was simply not weak enough to give us confidence the RBNZ will cut its cash rate at its July 9 meeting". The BNZ economists had previously picked there would be a cut next week.

"We still think the case for doing so is strong but with the market pricing almost no chance of a cut we do not believe the Bank will pull the trigger.

"We still think the cash rate needs to fall further so are staying with our pick that it eventually troughs at 2.75%."

Toplis said the overall message from the QSBO is that "growth is on the mend but inflation is dead".

He said a net 1% of businesses report that they have lowered prices in the last quarter and a net 2% expect to do so again.

"This only happens during recessions. At face value the degree of intent is such that it implies a real threat to the lower bound of the RBNZ’s [1% to 3% inflation] target. However, in each of the last two times when intentions have been so low CPI inflation has only dipped to around the mid-point of the target band. Be that as it may, if that is what the data portends it is still a strong indication the RBNZ can allow rates to push lower."

Kiwibank economists said the QSBO survey may have shown a lift in optimism, "but confidence is fragile, and at risk of reversing if offshore forces deteriorate. The RBNZ should cut below 3%".

ANZ senior economist Miles Workman said at face value, the QSBO should provide the RBNZ with "confidence that there is significant excess capacity out there that will keep underlying inflation contained", with weak economic momentum and subdued pricing intentions suggesting CPI inflation is unlikely to persistently overshoot the 2% target midpoint.

OCR below 3% 'will be required'

"In the fullness of time, we think a little monetary stimulus (an OCR below 3%) will be required, but in May the [RBNZ Monetary Policy] Committee didn't seem 100% convinced they should even be cutting to 3.25%, let alone under 3%."

In the QSBO, weak demand was the main concern with 68% of firms noting a lack of sales was the major constraint on their business – this is up from 64% in the previous quarter. 

“These trends indicate that weak demand is driving excess capacity in the New Zealand economy,” the survey says. 

Retailers were the most upbeat of the sectors surveyed with 40% of retailers expecting improvement in economic conditions over the next few months. 

The survey pointed to data from the RBNZ: “Over half of New Zealand mortgages are due for repricing over the coming six months. This means there is further relief ahead of many households as they face reduced mortgage repayments at the repricing of their mortgage rates. 

“We expect this to support recovery in retail spending amongst households over the coming year.” 

The building sector was the least optimistic with only a net 3% of building firms expecting better economic conditions in the next few months. This “cautious mood” likely reflects continued weak construction demand, the survey says. 

NZIER’s deputy chief executive Christina Leung says “this persistence in divergence in expectant and actual activity, it’s gone on for longer than I would have thought given that continued weakness in demand”.

Indicators point to some potential easing in inflation pressures

Cost and pricing indicators were eased in this latest survey and suggested an easing in inflation pressures in the June quarter, Leung says.

"Cost pressures eased slightly, while a net 1% of firms reported that they reduced prices in the June quarter. This reduced pricing pressure was particularly apparent in the building sector, with a third of firms reporting that they had cut their prices in the June quarter." 

Leung says with this easing in cost and pricing, there was room for some easing in monetary policy to support the economy.

NZIER expects one further 25 basis point cut to the OCR by the RBNZ in this cycle. 

While this has been pencilled in for July, caution by the RBNZ in its May statement means the potential for a pause in July.

The survey was conducted between May 23 and June 23. This came after the release of this year's Budget.

Additional reporting by David Hargreaves