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Businesses sink further into a mire of despond

Thursday 28th March 2019

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Businesses are getting ever gloomier with investment and employment intentions now barely positive and cost pressures rising. Export intentions have fallen to near record lows - below levels at any time during the Asian and global financial crises.

ANZ Bank’s headline confidence index shed a further 7 points in March and now a net 38 percent of respondents are pessimistic about general business conditions in the next 12 months.

A net 6 percent still expect their own businesses to improve, but that’s down 5 points from February.

“Most activity indicators eased slightly in March, consistent with our expectations that the economy is quietly losing steam,” says ANZ chief economist Sharon Zollner.

“A marked exception was residential building intentions which dropped sharply, led by Auckland – down 21 points to be the weakest since 2009,” Zollner says.

Nationally, the construction index fell from positive 3.8 points to negative 16.

At face value, this suggests significant downside risk for private sector residential building activity, but there are reasons to discount the data, Zollner says.

“The data can be volatile and spikes in both directions are not uncommon, so the fall may reverse over the next couple of months.

“The sharp drop may partly be related to the possible threat of a capital gains tax and may therefore not come to much in terms of actual activity.”

The Tax Working Group’s final report was released just before the March survey began.

Zollner notes construction companies' views about their own business are considerably better than their view of the sector as a whole – a net 3.6 percent of construction firms expect better times ahead.

She suggests the plunge might be related to credit availability – a net 40 percent of firms expect credit will be harder to get, down 2 points – or to the fact that Auckland house prices are now falling a little.

The latest Real Estate Institute data showed New Zealand house prices, excluding Auckland, rose 8.1 percent in the year ended February, but Auckland house prices fell 2 percent.

The ANZ confidence survey found a net 1 percent of firms are expecting to lift investment, down a point, while hiring intentions fell 2 points to 1 percent.

Profit expectations fell 3 points to a net 14 percent expecting profit declines while a net 55 percent are expecting higher costs. A considerably smaller 27 percent expect to raise their prices, up 1 point.

Export intentions fell to a net 1 percent from 3.3. “This doesn’t square with anecdotes and it is hard to know what to make of it,” Zollner says.

“The services sector is particularly pessimistic – it has some correlation with growth in short-term arrivals which is easing – whereas export intentions out of the manufacturing sector and the agriculture sectors are trending down but are not at such dire levels.”

Zollner notes the data hasn’t always been a good indicator for “discretionary” exports, particularly non-food manufactured exports, “but this cycle, it certainly has been. There is no doubt global growth is slowing so, all up, the signal should certainly not be dismissed out of hand.”

The New Zealand economy is “delicately poised” with GDP growth moderating but still respectable but with leading indicators suggesting the economy is running out of steam quite rapidly.

“Complicating the situation, the regional story is very mixed, with the party still in full swing in some smaller centres. But it does appear that increased wariness on the part of firms is starting to feed through into intentions, with a growing risk that the ‘hard’ data is going to start to roll over more markedly,” Zollner says.

Sharply lower export intentions despite a relatively steady exchange rate “suggest global factors are a part of it as well as disappointing profitability as firms struggle to absorb higher costs in a pricing-constrained environment,” she says.


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