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NZ business confidence hits 7-year low in June in NZIER quarterly survey

Tuesday 3rd July 2018

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New Zealand business confidence hit a seven-year low in June as cost pressures weigh on profitability and the downbeat sentiment is beginning to impact on future planning.

A seasonally adjusted net 19 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 10 percent that had expected a deterioration in the prior quarter. It was the lowest since March 2011.

Regarding firms' own trading, a net 7 percent experienced increased activity in the June quarter versus 15 percent in the prior quarter and a net 13 percent are anticipating more demand in the next quarter versus 16 percent in the March quarter. The June level was the lowest since March 2013.

The expected easing in demand point to softer economic growth in the second half of 2018, according to NZIER.  

"What’s concerning is the businesses are no longer expecting a recovery in profitability over the next quarter and that is starting to impact on their planning,” said NZIER principal economist Christina Leung.

The QSBO echoed the latest business confidence survey from ANZ Bank New Zealand, which also pointed to weaker activity and investment intentions.

ANZ senior economist Phil Borkin said headline business sentiment can be affected by numerous factors, such as the political environment, global themes or non-economic factors including succession planning.

Business confidence in both the ANZ and NZIER surveys plummeted after the change in government last September.

However, “when it comes to what firms are saying about their own activity and desire to hire and invest, it is a case of ‘ignore this information at your peril’ as history has taught us that this has some valuable information on how well the economy is doing,” Borkin said.

NZIER's Leung also said that while headline confidence can be pushed around by the political backdrop, the view that firms have about their own trading activity is more correlated to economic growth.

In a speech to the Otago Chamber of Commerce last Friday, acting Prime Minister Winston Peters took issue with that possible correlation.

According to Peters, “business confidence and real GDP growth show no correlation in this country.” Rather, the facts around growth “suggest an inherent political bias is pervasive in the business sector and the perceptions of stagnation do not have any basis in reality.” The speech was Peters' first to a business audience as acting PM.

The drop in confidence in the NZIER survey was pervasive across the regions, with Taranaki, Otago and Blenheim particularly downbeat. The retail sector was particularly downbeat, with business confidence in that sector falling to its lowest level since March 2009. 

According to Leung, “the lift in the minimum wage is likely to have played a key part in the sharp increase in costs, given the relatively greater proportion of the retail workforce that is low-waged.”

Importantly, the QSBO showed profitability remained weak in the June quarter with a net 16 percent reporting lower earnings, down from a net 7 percent that reported lower earnings in the prior quarter. A net 12 percent expect to report lower earnings in the next quarter, pointing to a lack of confidence in any rebound, said Leung.  

The QSBO showed a net 4 percent of firms indicating plans to reduce investment in buildings versus 1 percent that indicated they were planning to reduce it in March. A net 2 percent have plans to invest in plant and machinery versus 17 percent in the prior quarter.

Firms are still finding it difficult to hire new staff, with a net 44 percent saying skilled labour was hard to find, unchanged from March. A net 30 percent found it hard to attract unskilled labour, compared to a net 29 percent in the prior period.

Companies still expect to face cost pressures, with a net 41 percent anticipating increased costs compared to 35 percent in March. In terms of experienced costs, a net 36 percent reported higher costs compared to 31 percent in the prior period.

Pricing intentions lifted, with 29 percent expecting to lift prices in the coming quarter versus 21 percent in March, while a net 25 percent raised prices in June versus 16 percent in the prior period.


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