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Business confidence a tad higher but residential construction a red flag

Wednesday 29th May 2019

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Business confidence lifted slightly in May but was still in the doldrums, with residential construction intentions tumbling despite a capital gains tax being ruled out. 

A net 32 percent of the 364 respondents to the ANZ business outlook expect general business conditions will deteriorate over the coming year, versus 37.5 percent in April. Regarding expectations for firms' own activity, a net 8.5 percent anticipate an improvement, compared to 7.1 percent a month earlier.

The story was different in the building sector, however, with commercial construction intentions falling 12 points. Only a net 4.2 percent of commercial firms are expecting to lift their investment in the coming year. At the same time, residential construction intentions fell 7 points, with a net 27 percent expecting reduced activity, a 10-year low. The slide comes despite Prime Minister Jacinda Ardern's decision to drop a planned capital gains tax. 

"New Zealand needs more houses, but the construction sector is facing cash-flow and credit constraints. Despite the small sample, the data has been a pretty good indicator and suggests significant downside risk to the residential investment outlook," said ANZ New Zealand chief economist Sharon Zollner. 

Overall hiring intentions fell. The May survey showed a net 0.3 percent of respondents expecting to shed staff, whereas in April a net 4.3 percent were expecting to hire. The construction sector's employment intentions were at a 10-year low, with a net 22 percent expecting to cut staff.

Inflation indicators out of the survey were mixed. Both pricing intentions and reported cost pressures rose slightly, but the fall in inflation expectations from 2.04 percent to 1.81 percent took it to the lowest level since early 2017.

Zollner noted, however, the "recent fall to just under target may be related to the official cash rate cut in May and the associated commentary that more stimulus was required to deliver inflation at the 2 percent target midpoint over the medium term." 

While a net 49.7 percent of firms anticipate higher costs, a net 28.5 percent plan to raise prices. A net 9.6 percent expect profits to fall in the coming year, a slight improvement from the 13 percent expecting weaker earnings a month ago.

Investment intentions edged up to a net 2.9 percent reading from 1.5 percent in the prior survey. 

A net 26.7 percent of firms predict lower interest rates in the coming year, compared to a net 29.9 percent a month ago. Regarding ease of credit, 36.3 percent see it as more difficult, up from 35.1 percent a month ago. 


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