Praneeta Mahajan
Hamilton, July 5, 2023
This month’s Quarterly survey of business opinion by ASB Bank largely affirms the trend from last quarter showing tentative improvements in sentiment but from a weak base. General business confidence improved marginally, with a net 59% of respondents pessimistic about the outlook compared with a net 63% last quarter.
The results here are largely consistent with the direction seen so far in timelier surveys, while general business sentiment continues to make marginal gains, firms are still cautious about the outlook for their activity. After tentative improvements last quarter, a larger chunk of firms are reporting that trading activity declined over the last quarter (up from a net 10% to a net 13%).
The proportion of businesses expecting a deterioration in activity over the next three months has also followed a similar trajectory, widening again (from a net 8% to a net 17%), though it remains above its lows late last year.
Business surveys are an imperfect guide, but this is all consistent with pretty anaemic growth conditions in the wider economy. “All of this is helping keep businesses cautious on investment. In particular, intended investment in plant and machinery suffered a chunky fall, with a net 26% not planning any expansion compared with a net 11% last quarter,” stated the report.
The subdued mood across the spectrum
Sector-wise, the subdued mood was pretty consistent across the economy. Previously, the building sector has stuck out like a sore thumb, but both output and new orders improved meaningfully this quarter (from a net -39% to -20% and a net -60% to 30%). That is an ultra-low base but may reflect the increasing sense the housing market is reaching a turning point. By contrast, manufacturing confidence weakened further even as respondents reported a sizable lift in experienced output. Both the retail and wider services sectors remain comparatively downbeat.
Continued easing in capacity constraints but costs are proving stubbornly weaker demand and some supply-side improvements (like high levels of net migration) are reducing capacity pressures.
Finance Minister Grant Robertson said, “This year is a difficult one for the global economy, marked by slowing growth and prolonged high inflation. New Zealand is not immune to those forces while the North Island weather events have also taken their toll on affected communities, which will flow through to the Government’s books,” Grant Robertson said.
“New Zealand is well placed as we face these challenges, with people in work in record numbers, wages are growing, inflation pressures are easing, tourists and international students are returning and overseas workers are helping business fill vacancies.”
Stubborn costs continue
Costs are still proving extremely stubborn across sectors. Businesses are reporting an increase in costs, which rose to a record high of a net 70%, an increase from last quarter’s net 63%. Marginally fewer businesses are expecting those costs to continue increasing over the next three months, which seems to be some respite for now. The proportion of respondents experiencing higher selling prices accelerated to a twelve-month high of a net 71% (up from a net 68% last quarter), but expected selling prices are coming down slowly (from a net 60% in Q1 to a net 48% this quarter).
Too soon to declare victory over inflation yet
Recent easing in cost and pricing readings will be a comfort to the RBNZ that things are moving closer to target. Signs of less competition for workers and weaker wage inflation should continue reducing inflationary pressures over time.
However, it is far too early for the bank to declare victory and contemplate OCR cuts. Cost and pricing metrics may be coming down, but they are not yet consistent with 1-3% inflation.
Soggy confidence readings affirm that the bank’s efforts to cool activity look to be working, but the labour market entered this downturn from an ultra-tight starting point and it will take some time for demand to be back in concert with supply.
The ASB report stated that “The Bank would not want to undo the work it has done by sounding overly triumphant in its next statement and risk inflation accelerating again. We do not expect OCR cuts until mid-2024, meaning business and retail interest rates are likely to stay high for some time to come.”
Praneeta Mahajan is an Indian Newslink reporter based in Hamilton.
