Business confidence is showing a continued recovery, according to the latest Quarterly Survey of Business Opinion (QSBO) from the New Zealand Institute of Economic Research (NZIER).
Released on Tuesday morning, the QSBO for the September quarter found that a net 40% of firms expect a better general economic outlook in the coming months, up from 12% during the June quarter – a 28% jump in confidence.
The NZIER said this increase in business optimism occurred despite renewed conflicts between the US and Iran during the quarter, which pushed up global oil prices to new highs.
“While the impact of the developments in the Middle East appears muted for now, ongoing uncertainties over geopolitical conditions and global oil supply remain a headwind for New Zealand’s economic recovery,” the NZIER said.
The NZIER has conducted its Quarterly Survey of Business Opinion (QSBO) since 1961. It is New Zealand’s longest-running business opinion survey and is closely watched by the Reserve Bank (RBNZ).
Each quarter, the NZIER asks around 10,000 firms whether business conditions will deteriorate, stay the same, or improve. The survey’s responses provide insights about business trends much faster than official statistics and act as leading indicators about the future state of the NZ economy.
A lack of demand remained the primary constraint for firms during the September quarter and firms also continued to report that it was more difficult to hire skilled workers. Only a small proportion of firms reported it being easier to find unskilled workers.
“Although demand remains soft overall, these developments point to signs that spare capacity in the New Zealand market is dissipating,” the NZIER said.
According to the September survey, expectations of a recovery in demand have supported a turnaround in firms’ investment intentions, with plans to invest in buildings, plant and machinery over the coming year.
The NZIER said this is a contrast from earlier in the year when firms were more cautious around investment. A net 5% of firms reported they had cut staff members during the September quarter, down from 10% in the June quarter.
Higher interest rates will restrict household spending
The September survey found that a net 57% of retailers are expecting better general economic conditions over the coming months, despite declines in new orders and sales. While cost pressure remained “intense” for the retail sector, the weak demand meant retailers weren’t able to fully pass on higher costs by rising prices.
The service sector was also feeling positive about the economic outlook, despite reporting a decline in the volume of services and weak profitability in the September quarter. The NZIER said there were “widespread expectations” that interest rates would rise over the coming year.
The RBNZ raised the Official Cash Rate (OCR) from 2.5% to 2.75% in September, for the second consecutive monetary policy meeting in a row.
The Reserve Bank is charged with keeping inflation within a 1% to 3% range – specifically targeting 2% – and uses the OCR to try and keep inflation low and stable. The Reserve Bank’s Monetary Policy Committee (MPC) reviews the OCR 8 times a year, based on how the economy is tracking.
The RBNZ’s next monetary policy meeting is on October 28, 10 days before the NZ general election on November 7.
The NZIER said the recent weakness in the retail and services sectors reflects the headwinds facing New Zealand's household sector.
“We expect higher interest rates to restrain household discretionary spending over the coming year as households’ mortgages come up for repricing and their payments increase,” the NZIER said.
'Sharp turnaround'
The September QSBO survey reported that the building sector saw a “sharp turnaround” in sentiment during the quarter, with 46% of building sector firms expecting an improved general economic outlook over the coming months, in contrast to their pessimism earlier this year.
“Against this backdrop was a marked improvement in demand, with building sector firms reporting increases in both new orders and output. A small proportion of building sector firms also increased their staff numbers over the quarter. Intense cost pressures and weak pricing power continued to weigh on the sector’s profitability in the September quarter,” the NZIER said.
Despite this recovery reported by building sector firms, however, the survey said the measure of architects’ work in their own office suggests a “flat pipeline” of housing construction work over the next twelve months, alongside a reduced pipelines of commercial and government construction work.
“Overall, the outlook for construction activity is soft,” the NZIER said.
The manufacturing sector, on the other hand, became “upbeat” in the September quarter, with manufacturers continuing to report increased domestic and export demand and remaining optimistic about the demand outlook ahead. However, profitability in the manufacturing sector “deteriorated” and costs “intensified” over the quarter, with the proportion of manufacturers able to raise prices decreasing.
The NZIER said the easing of the QSBO’s cost and pricing indicators from high levels suggests a reduced risk of higher fuel prices flowing through to broader inflation pressures, with the proportion of firms reporting higher costs fell from a net 54% to a net 47% in the September quarter.
“Soft demand continues to limit the extent to which firms can pass on higher costs by raising prices,” the NIZER said.
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