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Deepening business gloom likely to push annual GDP below 1%

Tuesday 1st October 2019

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Businesses continued to sink deeper into gloom during the September quarter and that will likely shave annual GDP growth to below 1 percent, according to the New Zealand Institute of Economic Research's latest quarterly survey of business opinion.

Most forecasts for annual growth, including NZIER's are still above 2 percent.

Headline confidence in the QSBO fell a point to a net 35 percent of businesses in seasonally adjusted terms expecting general economic conditions to worsen, the weakest level since March 2009 in the depths of the global financial crisis. The New Zealand dollar was marginally weaker, recently trading at 62.56 US cents.

NZIER principal economist Christine Leung says that "the more concerning development has been the decline in firms' own activity."

A net 11 percent experienced weaker activity in the latest quarter, which is the worst level since September 2010, again on a seasonally adjusted basis.

ASB Bank chief economist Nick Tuffley says the survey flags the risk that the economy lost further momentum in the September quarter and "with inflation indicators also softening, the need for further stimulus is greater" and increased his expectations for official cash rate cuts.

"We now expect a further 50 basis points in total of OCR cuts, 25bp in November and now 25bp in February, taking the OCR to a fresh record low of 0.5 percent," Tuffley says. 

"After the decidedly mixed response" to the Reserve Bank's August 50bp OCR cut, "we expect the RBNZ will revert to smaller 25bp steps."

Most sectors were downbeat in the quarter, although manufacturers are still the most pessimistic, even though their confidence lifted slightly.

"The continued uncertainty over how the trade war between the US and China will play out is dampening manufacturing demand globally," Leung says.

"We expect this will remain a headwind for the manufacturing sector over the coming year."

A net 22 percent of manufacturers experienced weaker New Zealand deliveries in the quarter, up from 19 percent in the June quarter while a net 16 percent experienced a decline in exports, up from a net 9 percent in the previous quarter.

There are also strong signals that demand in the construction sector is weakening with a net 27 percent of builders saying their new orders fell in the latest quarter compared with a net 3 percent experiencing fewer orders in the June quarter.

A net 16 percent of architects are expecting less residential work in the next 12 months, down from 8 percent expecting more work in the June quarter. A net 24 percent are expecting less commercial work compared with a net 4 percent expecting more commercial work last quarter.

Expected government work remains in positive territory with a net 5 percent expecting more work in the next 12 months, but that's down from a net 13 percent expecting more work last quarter.

The services sector, which has been holding up reasonably well both domestically and globally, is also becoming significantly more pessimistic with a net 17 percent experiencing lower volumes in the September quarter compared with a net 4 percent in the June quarter experiencing lower volumes.

The services sector has also cut back on hiring with a net 11 percent shedding staff in the latest quarter, up from 3 percent in the previous quarter.

Retailers are also becoming more downbeat with a net 14 percent experiencing lower sales in the September quarter, up from 10 percent in the June quarter, and a net 5 percent expecting lower sales volumes in the next six months. A net 5 percent of retailers have placed fewer orders overseas.

Employment intentions generally have soured with a net 10 percent of all firms having cut back on hiring, up from a net 6 percent in the June quarter, although a net 11 percent are expecting to hire more staff this quarter.

They're still finding it difficult to find both skilled and unskilled staff, but slightly less difficult than previously.

Leung says the labour responses suggest employment growth will be about 1 percent over the next year.

A net 33 percent experienced higher costs in the September quarter and a net 35 percent are expecting cost increases this quarter, but only a net 7 percent expect to be able to raise their prices this quarter – a net 1 percent had to cut prices in the September quarter.

A net 64 percent are expecting interest rates to fall further over the coming year.


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