By Bernard Hickey
The New Zealand Institute of Economic Research’s (NZIER) closely watched Quarterly Survey of Business Opinion (QSBO) found confidence about the general business situation worsened to its lowest level since March 2011 in the September quarter.
But the survey, which does not include the agricultural sector, also found firms were more confident about their own business outlooks than they were in the June quarter and much more confident about their own businesses than the economy more broadly.
“The recent dominance of negative news about the New Zealand economy has left many businesses feeling uneasy about general business conditions, but few have seen a direct effect on demand in their own business,” NZIER Senior Economist Christina Leung said.
The survey of 955 businesses found an actual net 14% saw the general business situation deteriorating over the next 12 months, which was a net 19 percentage point worsening from a net 5% in the June quarter who saw the economy improving over the year ahead. The seasonally adjusted measure worsened to a net 9% seeing worsening from a net 6% seeing improvement.
However, the survey’s measure of firms’ view of their own trading activity showed a net 22% saw an improvement in actual terms in the next quarter, which was up from a net 9% in the June quarter who saw improvement in the quarter ahead. The seasonally adjusted measure found a net 17% seeing improvement in the next quarter, up from a net 13% in the June quarter. A net 12% reported their own businesses actually saw improved conditions in the September quarter in seasonally adjusted terms, up from a net 10% who reported improvement in the June quarter.
Very weak inflation pressures
But NZIER said the biggest feature of the survey was the evidence that firms were not yet able to pass on higher imported costs because of the fall in the New Zealand dollar over the last year.
“The thing that stood out for us was just how weak the inflation indicators were,” Leung said.
“Firms are finding it hard to pass on those cost increases to their customers,” she said.
The survey found a net 6% had cut their prices in the September quarter, whereas a net 1% had increased their prices in the June quarter. Just 1% expected to increase their prices in the December quarter. It also found, however, that a net 17% expected costs to rise over the next quarter while a net 19% had experienced higher costs.
Leung said she expected some of the effects of the fall in the New Zealand dollar’s fall in the last year to flow through in the next six months.
“They are looking to put in those price increases in the next quarter. The million dollar question will be whether they will be able to do that.”
The survey found this squeeze between higher costs and the inability to pass them on with price increases had worsened expected profit a net minus 2% from a net 11% expecting improvement.
Leung said she expected the Reserve Bank to cut the Official Cash Rate one more time to a trough of 2.5% later this year, with a cut on October 29 a “line ball” call.
The survey found just 15% viewed capacity as a constraint, unchanged from the previous quarter. The QSBO’s closely-watched measure of capacity utilisation fell to 91.4% in the September quarter from 93.4% in the previous quarter.
Leung expected annual GDP growth to slow to around 2% by the end of 2015, before rebounding to above 3% next year as the benefits of the lower New Zealand dollar flow through.
Employment and investment expectations
The survey found a net 15% expected to hire more workers in the next quarter, up from a net 10% in the June quarter. The percentage who had employed more in the September quarter was 9%, down from 11% in the June quarter. The survey noted a sharp drop in business confidence in the building sector in the September quarter, with new orders dropping to minus 8% from positive 25% in the June quarter.
Investment intentions for those in the building sector also fell for a second quarter, dropping to a net 3% expecting to invest more, down from 5% the previous quarter.
Retailers, however, were more optimistic in the survey, with a net 7% expecting improved sales, which was up from net 7% expecting sales to deteriorate when surveyed in the June quarter.
The New Zealand dollar was firm at 64.9 USc in late morning trade after the release, although expectations of near 0% US interest rates staying for longer and the TPP deal may have been factors.
ANZ Senior Economist Philip said the survey was consistent with subdued growth, but showed the economy had not capitulated.
“If anything, the activity indicators within the survey were a touch better than expected highlighting a decent backbone,” Borkin said.
“However, inflation nuances remained soft, with a margin squeeze story apparent. This will keep the RBNZ focused on medium-term inflation trends and sees the balance of risk still skewed towards additional monetary policy easing,” he said, adding ANZ expected one more cut, but not necessarily later this month.
ASB’s Jane Turner described the survey result as mixed for the Reserve Bank and ASB still saw the next rate cut as a close call between October and December.
Turner also pointed to softer labour conditions and repeated ASB’s forecast of a rise in unemployment to a post-GFC highs of 7%.
“More slack in the labour market also implies less pressure on inflation going forward,” she said.