Business confidence in the economic recovery is faltering, with firms reporting lower profits and reduced investment intentions.The New Zealand Institute of Economic Research's latest quarterly survey of business opinion shows firms are less upbeat than t
Business confidence in the economic recovery is faltering, with firms reporting lower profits and reduced investment intentions.
The New Zealand Institute of Economic Research’s latest quarterly survey of business opinion shows firms are less upbeat than they were and that their expectations of growth in previous surveys have not been borne out by economic reality.
Smaller firms – whose pick up at the turn of an economic cycle tends to lead a recovery - are now reporting deteriorating conditions, after a nine month period of comparative optimism.
“They are at the bleeding edge of the cycle so if they are reporting this, it is a big warning sign about what may be happening,” said the institute’s principal economist Shamubeel Eaqub.
The institute’s previous surveys have shown optimism at record high levels but Mr Eaqub has always warned that the optimism appeared to be premature.
That caution proved to be justified. Since the last survey, firms have scaled back their expectations of their own activity – a net 11% are in positive territory, down from 15% last time; while expectations of their own profitability, a net negative 2% three months ago, are now a net negative 6%.
Cost pressures are starting to increase: expectations increases of firms’ own costs have leapt from 25% to 36% this quarter, while expectations about their own prices are up even further, from a net 27% to 40%.
That does not necessarily mean inflationary pressures are building, Mr Eaqub said.
“We know a lot of one offs are coming through, GST, ACC, ETS and so forth: it’s not clear how much of this is underlying inflation.”
When the usual leading indicator sectors for inflation –retail and construction – are examined, they show “very, very weak prices,” he said.
Investment intentions, which were net positive 9% last time are now a flat zero.
This is a very worrying sign. Again, this is a dip of one quarter.
But, just as he had warned earlier optimism turned out to be a little premature, Mr Eaqub warned it would be too soon to read the latest survey as meaning the recovery is over.
It could just be “a stumble” in the recovery, he said, and further surveys would be needed before anyone could conclude the recovery was over or that there was a “double dip” recession on the way.
Some signs are positive: hiring intentions are still comparatively strong, he said.
The Reserve Bank’s decision to begin lifting interest rates in early June did not appear to have affected the result, he said – even though he believed the Reserve Bank should have held off lifting the official cash rate.
