Business confidence sinks in 'June gloom'
The latest national reading of business confidence recalls the “winter of discontent” that plagued the first year of the three-term fifth Labour government.
ANZ’s Business Outlook survey says a net 39% of businesses are pessimistic when asked what they thought about business conditions in the year ahead
This is down 12 points from May and is back at November lows just after the formation of the Labour-NZ First Coalition government.
The ANZ survey shows business confidence has been falling since June last year as economic headwinds have strengthened.
However, when businesses were asked about expectations of their own activity, a majority remained positive, though the reading dipped from positive 14 to positive 9.
ANZ says this question is a better gauge of future GDP growth.
The result contrasts with Westpac’s latest survey of regional business confidence, issued yesterday. It revealed a split between a hugely pessimistic Auckland and six positive regions. Two others were negative while one was largely unchanged.
ANZ senior economist Liz Kendall says retailers remain the least positive (+6), while manufacturers are the most upbeat (+16) when looking at their own activity.
“Our composite GDP growth indicator [which combines business expectations and intentions with consumer confidence] remains expansionary (with robust consumer confidence providing support),” she says.
“This suggests the economy may continue gently losing steam over coming months, despite the support coming from fiscal stimulus and high commodity prices.”
ANZ says this points to an annual GDP outcome of just 2% compared with the bullish forecast of 3.1% in the Treasury budget projections.
The economy will be boosted by the government’s fiscal stimulus and strong terms of trade – confirmed in figures also out today. But this is offset by cost, credit and capacity headwinds.
Other key points from the survey are:
• A net 4% of firms are expecting to lift investment, up 1 point but still low;
• Employment intentions fell from +7% to +1%. They are flat for retail, and negative across construction and agriculture;
• Profit expectations fell 4 points to -13%. All sectors are in the red except construction (0%); retail is the weakest sector (-17%);
• A net 32% of businesses expect it to be tougher to get credit, which is within familiar ranges seen since late 2016;
• Firms’ pricing intentions were little changed at +27% versus +26% last month. Inflation expectations at 2.3% remain in recent ranges; and
• Residential construction intentions lifted 1 point to +18%, but commercial intentions dropped sharply from +5% to -11%, the lowest level since 2010.
OCR review implications
JP Morgan economist Ben Jarman says the implications for the Reserve Bank's OCR review on Thursday are on the easing side – a potential drop in the official cash rate from 1.25%.
"Beyond that, the RBNZ faces a finely balanced position of currently low unemployment but also the feeling that we are at a cycle turning point, where the risks are to slower growth and a loosening labour market from here on," he says.
"The RBNZ will likely place emphasis on fiscal policy as plugging the apparent gap in private demand, allowing for an eventual hike. But nothing is coming imminently on this front, so our sense is that the risks are more toward a rate cut than a rate hike in the near term.In a quarterly survey of the most important problem businesses are facing, 28% say the lack of skilled employment in the construction, manufacturing and services sectors."
In ANZ's accompanying quarterly survey of the most important problem businesses are facing, 28% say the lack of skilled employment in the construction, manufacturing and services sectors.
The government has responded to this with a package called the Skilled Shortage List aimed at the construction sector and KiwiBuild in particular.
The second most important was regulation at 17% – the highest reading since this data started being collected in March 2012. Competition and low turnover were the other top-rated problems, at 13% and 10% respectively.
Retailers’ expected profitability fell to negative 17, suggesting a limited ability to pass on cost increases in the face of strong competition.
Their own activity outlook and business confidence are the weakest of all sectors, creating something of a mismatch when compared with strong consumer confidence.
An update on this will be released on Friday.