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Business confidence sours further, points to economic slowdown

Tuesday 2nd April 2019

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New Zealand business confidence fell further in the March quarter, pointing to slower economic growth in the first half of 2019.

A seasonally adjusted net 27 percent of firms surveyed in the New Zealand Institute of Economic Research's quarterly survey of business opinion expect economic conditions to deteriorate over the coming months compared with a seasonally adjusted 18 percent that had expected a deterioration in the prior quarter.

"This QSBO is a fairly downbeat read of the economy... it was comprehensively negative," said Christina Leung, NZIER principal economist.

The New Zealand dollar fell and was trading at 67.90 US cents at 10.20am from 68.05 cents just prior to the release. 

Regarding their own activity, a net 7 percent of respondents expect their own business activity will pick up in the next three months, down from 16 percent three months ago. A net 1 percent experienced contracting activity in the March quarter versus a net 4 percent that saw an improvement in the December quarter. 

While the rising number of businesses expecting a deterioration in general economic conditions showed they started the year more downbeat about the economy, "of more concern was the decline in firm's own domestic trading activity," said Leung.

NZIER says the own activity measure tends to be a better indicator of GDP than the headline confidence figures. 

"The data suggests further slowing in economic growth over the first half of 2019," she said, adding annual growth could slow to below 2 percent over the first half of the year. The last time New Zealand's rolling annual growth figure was below 2 percent was in the December quarter of 2011. 

Leung said the QSBO should give the central bank comfort in its view that the next move will likely be a rate cut. It does "provide more justification for them to be cutting interest rates," she said. 

Last Wednesday, Reserve Bank governor Adrian Orr surprised markets when he moved to a more dovish stance. 

The QSBO showed profitability remained weak in the March quarter, with a net 21 percent reporting lower earnings versus 22 percent in the prior quarter. A net 16 percent expect to report lower earnings in the next quarter versus a net 15 percent in the December quarter, NZIER said.

The common theme has been a prolonged period of rising costs that firms have struggled to pass on to customers through higher prices, Leung said.

"Businesses across most sectors reported a weakening in domestic demand. In particular, manufacturers remained the most pessimistic as domestic sales dropped sharply," Leung said. 

The outlook for the building sector is "also gloomy" she said, with firms reporting weaker construction demand. She also noted that while cost pressures in the sector have intensified further, a net 14 percent said they reduced prices. "This has led to a sharp drop in building sector profitability," she said. 

The QSBO showed a net zero percent of firms intend to invest in building versus a net 4 percent who had expected to reduce that investment in the December quarter. A net 2 percent, however, plan to reduce investment in plant and machinery versus a net 7 percent that had planned to invest in the prior quarter. The 2 percent was the lowest since March 2012.

Overall, businesses are more cautious about expanding, she said.

Firms are still finding it difficult to hire new staff, with a net 50 percent saying skilled labour is hard to find, versus 53 percent in December. A net 33 percent found it hard to attract unskilled labour, compared to a net 35 percent in the prior survey.

Companies still expect to face cost pressures with a net 43 percent anticipating increased costs compared to 36 percent in December. In terms of experienced costs, a net 38 percent reported higher costs compared to 47 percent in the prior period.

Pricing intentions lifted, with 27 percent expecting to lift prices in the coming quarter versus 21 percent in the December quarter. A net 16 percent raised prices in March versus 20 percent in the prior period. 


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