Business confidence lifts, but remains negative

Businesses continue to be pessimistic about the New Zealand economy according to NZIER’s latest Quarterly Survey of Business Opinion. Businesses reported that their own activity was faring well, in spite of the gloomy outlook wider economy. Thomas Coughlan reports.

A net nine percent of businesses expect economic conditions to deteriorate in the coming months according to NZIER’s latest Quarterly Survey of Business Opinion. This is slightly lower than the figure of 11 percent reported in the last quarter, but still a long way off the mainly positive sentiment that businesses had expressed since 2012.

Businesses continue to feel confidence in their own activity and outlook. A net 15 percent of firms reported a lift in demand in their own businesses in the March 2018 quarter and 16 percent expect increased demand over the next quarter. That is up from a net 10 percent who experienced positive trading conditions for themselves in the December quarter, but down slightly from the net 16 expecting better conditions in the next quarter.

This is slightly less pessimistic than the ANZ survey of business confidence which found 20 percent of businesses were pessimistic about the year ahead. Both surveys reported pessimism was easing slightly and was around the long-term average.

The continued disconnect between overall economic outlook and the actual trading activity of businesses suggests the pessimistic outlook has more to do with sentiment around the election of the Labour-led Government than actual business activity. This negative sentiment had yet to feed into actual business activity.

Retailers are the most pessimistic. They will bear the brunt of the Government’s minimum wage increases. Cost pressures remain intense and businesses are struggling to pass-on cost increases to consumers, meaning rising costs from wage increases will eat away at firms’ profitability, the NZIER reported. A net 7 percent of businesses saw reduced profitability in the March quarter and firms expect this to continue in the next quarter.

Fewer firms are looking to hire staff in the next quarter as labour costs increase. Last quarter, a net 12 percent of firms were looking to increase headcount, this quarter the figure is a net 6 percent of firms. This will likely lead to a modulation in employment growth in the future.

Firms are increasingly looking to invest in plant and machinery, which could suggest increased labour costs are encouraging businesses to invest in labour-saving and productivity-increasing technology. A net 17 percent of firms were looking to invest in this area, up from a net 10 percent in the last quarter.

The optimistic outlook for plant and machinery investment was in stark contrast to firms’ pessimism about investment in buildings where there is a net 1 percent negative outlook. Investment intentions in plant and machinery and buildings have tended to track together since 1998.