NZIER says QSBO shows the ‘fragile’ economic recovery in June quarter was helped by easing oil crisis, but warns that geopolitical uncertainty and November election will weigh on firms over the coming months

Business confidence is making a fragile recovery, according to the latest New Zealand Institute of Economic Research (NZIER) Quarterly Survey of Business Opinion (QSBO).

Released on Tuesday morning, the QSBO for the June quarter shows a net 12% of firms expect an improvement in general economic conditions over the coming months, on a seasonally-adjusted basis. 

It’s an increase from the March quarter when only a net 1% of firms expected improvement in this area.

The NZIER attributed the “fragile recovery” in business confidence in the June quarter to the recent easing of the global fuel crisis.

“However, geopolitical conditions in the Middle East remain highly volatile and uncertain, with tensions between the US and Iran re-escalating and fuel prices resurging in recent weeks,” the NZIER said.

Overnight, US President Donald Trump announced that the United States will impose a 20% toll on all ships passing through the Strait of Hormuz, which will close all traffic except Iranian-linked vessels.

The NZIER said uncertainty over the upcoming New Zealand general election on November 7 will also likely to weigh on firms' hiring and investment intentions in the coming months.

The QSBO has been running since 1961, making it NZ’s longest-running business opinion survey. Every quarter, about 10,000 firms are asked whether they think business conditions will deteriorate, stay the same, or improve. The latest QSBO was undertaken between June 10 and July 7. The NZIER said nearly all of the survey responses were received on two dates: June 10, when the survey was sent out, and June 17, after the US and Iran signed a Memorandum of Understanding. 

The NZIER said while business confidence had picked up in the June quarter, demand in firms’ own business was “broadly flat” and only a net 1% of firms reported increased activity in the three months to June on a seasonally adjusted basis.

The current environment of “ongoing uncertainty” is continuing to drive caution amongst firms when it comes to hiring and investment, according to the QSBO.

The NZIER said a net 10% of firms had reported that they had reduced staff numbers in the June quarter and a net 1% of firms plan to reduce their staff numbers in the September quarter.

A net 3% of firms are planning to cut investments in buildings, plants and machinery over the next year.

Inflation pressures continue

The NZIER said the QSBO’s cost and pricing indicators in the June survey suggested a “lift” in inflation pressures across the NZ economy.

“The proportion of firms reporting higher costs rose from a net 37% to over half in the June quarter, while the proportion of those able to pass on higher costs by raising prices picked up to a net 41%.”

Cost pressures were found to be “particularly acute” in the building and retail sectors, but the NZIER also noted that building sector firms had cut their prices over the June quarter.

“The building sector remains downbeat,” the NZIER said.

A net 6% of building sector firms expect a worsening in general economic conditions over the coming months, which the NZIER said was less pessimistic than in the March quarter. 

Overall pessimism in the sector was driven by subdued construction demand, according to the QSBO.

“Building sector firms continued to report declines in both new orders and output in the June quarter. This weak demand continued to put the pricing power of building sector firms under pressure, such that they cut their prices in the June quarter despite increasing costs. This has lowered the profitability of the building sector in the June quarter,” the NZIER said.

Retailers were found to be remaining optimistic about the outlook and demand over the coming months due to new orders and sales improving over the June quarter.

“The proportion of retailers who were able to pass on higher costs by raising prices also increased in the June quarter, but retailers reported weak profitability as costs also surged,” the NZIER said.

In comparison, the QSBO reported that sentiment in the manufacturing sector was “neutral” as manufacturers were neither positive nor negative about the economic outlook in the upcoming months. Manufacturers did report increased domestic and export demand and improved profitability in the June quarter but also expected that demand and profitability to decline in the near future.

“Overall, these results suggest a heightened risk of high inflation persisting in the New Zealand economy,” the NZIER said.

Annual inflation as measured by Statistics NZ’s consumers price index (CPI) came in at 3.1% in the March quarter. The June quarter CPI is due for release on July 21. 

The Reserve Bank (RBNZ) is charged with keeping inflation within a 1% to 3% range and specifically targets 2%. The QSBO is closely watched by the RBNZ, which raised the Official Cash Rate (OCR) from 2.25% to 2.5% last week. The next monetary policy meeting is on September 2.

The NZIER has forecast that the RBNZ will continue to return interest rates to more neutral levels by raising the OCR from 2.50% to 2.75% in the September meeting.