Business confidence drops to four-year low as economic outlook worries firms

A net 9% of firms in the New Zealand Institute of Economic Research's quarterly survey of business opinion predict general business conditions to get worse.

New Zealand business confidence extended its decline in the third quarter, plunging to its lowest level in more than four years, with local firms now expecting conditions to deteriorate in a tougher economic climate.

A net 9% of firms in the New Zealand Institute of Economic Research's quarterly survey of business opinion predict general business conditions to get worse, sliding from an optimistic reading of 5% three months earlier, and the lowest reading since March 2011. However the outlook for their own activity remained upbeat, with a net 17% of firms expecting improved trading in the coming quarter, up from the June quarter's reading of 13%.

A sustained drop in dairy prices, forecasts for dry weather, and an absence of inflation saw the Reserve Bank lower the official cash rate three times this year, from 3.5% to 2.75%, and prompted economists to downgrade their outlook for economic growth. Adding to that were concerns about a stuttering Chinese economy and how that will flow through to demand for commodities.

"The drought and the slowing growth in China and the potential impact on the New Zealand economy – that has made a lot of business uneasy about what's going to be happening in the New Zealand economy in the coming months but as yet they haven't seen the effects in their business," NZIER senior economist Christina Leung said. "Despite concerns over the broader outlook, businesses are still looking to hire and invest in plant and machinery."

Ms Leung noted weakness in inflation, with a net 6% of business cutting prices in the quarter, the lowest reading since June 1999, sliding from a net 1% of firms raising prices in the prior period.

NZIER expects a fourth interest rate cut this year. Ms Leung said the central bank would keep rates steady at the October monetary policy announcement but would lower the key rate again before the end of the year.

"The question is, are we in an emergency environment that warrants emergency of settings at 2.5%?" Ms Leung said. "They'll want some ammunition. Are we in an environment that was as dire when we were at 2.5%?"

The survey showed a net 63% of firms in the financial services sector expected lower interest rates, up from 25% in the June quarter.

A net 3% of firms expect reduced profit, a small improvement from a net 4% three months earlier, as a weaker dollar increased costs and squeezed margins. In the coming quarter a net 11% predict better profitability as they pass on costs, a turnaround from last quarter's reading, where a net 2% expected reduced profitability.

A net 19% of firms reported an increase in costs in the September quarter, up from a net 17% of firms in the June quarter.

Hiring intentions improved, with a net 15% intending to take on more staff in the quarter, up from a net 10%. It was also becoming easier for firms to find skilled staff, with a net 23% of respondents finding it difficult to find labour, an improvement from the previous quarter's net reading of 30%. A net 3% of firms found it difficult to find unskilled labour, compared to a net 10% the prior quarter.

Retailers are more optimistic about their sales outlook, with a net 7% of firms expecting improved sales, from the previous quarter's pessimistic outlook. A net 10% expected sales to improve over the next six months, up from a net 2%.

Manufacturers reported improving conditions with a net 8% reporting increased exports, up from a net 4%, however domestic demand remained weak.

Business confidence dropped sharply in the construction sector, with a net 8% of firms not reporting any new orders.

A net 30% of service firms surveyed expected higher volume in the coming quarter, up from a net 14%, although increased competition weighed on profitability, with a net 10% expecting to cut prices in the coming quarter.