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Business sentiment fades as reality fails to match expectations

Suze Metherell
Tue, 07 Oct 2014

New Zealand business confidence continued to slide in the September quarter, as the positive outlook seen earlier in the year wasn't backed up by similarly strong actual economic activity, according to the latest Quarterly Survey of Business Opinion from the New Zealand Institute of Economic Research.

A net 20 percent of businesses remained optimistic in the September quarter, down from 32 percent in the June quarter. The measure has fallen some 50 percent from its peak in late 2013, excluding seasonal variations, and has moderated across all sectors and regions. The most recent quarter remains well above the historical average of net minus 5 percent.

"None of these readings are panic stations, they're a sign things are coming off the boil," NZIER princpal economist Shamubeel Eaqub told media at a briefing. "We had a very strong first half of the year and perhaps the second half of the year won't be as strong."

Since the start of the year, expectations for New Zealand's economic growth have slowed, with Treasury in August cutting its forecast for gross domestic product growth to 3.8 percent in the year ending March 31, 2015, from a previous estimate of 4 percent. A faster decline in terms of trade from the highest levels in 40 years, a sharp drop in international dairy and log prices, New Zealand's largest and third-largest export commodities, and a slower pace of domestic inflation suggest economic momentum may be slowing.

Optimism about domestic trading activity, which is closely aligned with economic growth, slipped to a net 14 percent positive in the quarter, seasonally adjusted, from a net 15 percent positive in the June quarter, and from a peak of net 25 percent positive in the last quarter of 2013. Expectations for the coming quarter fell to a net 29 percent from a net 32 percent.

"Confidence is a necessary but not a sufficient condition for decisions that drive economic activity," the survey said. "When businesses are optimistic they are more likely to hire and invest - but not always. In the last six to nine months, intentions have been positive, but hiring, investment and sales have not followed."

The services sector, which is New Zealand's largest sector in the economy, stalled in the quarter, NZIER said. The sector's hiring intentions fell to net 1 percent positive from net 8 percent in the June quarter.

Confidence across the building and construction sector rose, with a net 25 percent of firms hiring in the September quarter, up from a net 18 percent in the June quarter, while new orders rose to a net 10 percent, from a net 9 percent and its output rose to a net 16 percent from 14 percent. Manufacturing was mixed, as output rose to net 21 percent positive from net 6 percent, while domestic sales fell to a net minus 1 percent from net 15 percent positive in the June quarter, but the outlook for exports improved, with a net 18 percent expressing optimism, from net 10 percent the previous quarter.

Ease of finding skilled labour improved, with a net minus of 26 percent saying it was difficult to find qualified staff, from a net minus 32 percent the previous quarter, while unskilled labour was at net minus 7 percent, from net minus 11 percent in the June quarter. Firms expecting to hire staff in the next quarter rose to net 18 percent, from net 15 percent.

The survey comes after Reserve Bank governor Graeme Wheeler kept interest rates on hold at last month's monetary policy statement and signalled a slower pace in future hikes, having increased the official cash rate 100 basis points to 3.5 percent in four consecutive increases starting in March. The hikes had been intended to take the steam out of an over-heating property market in Christchurch and Auckland, but since then, lower-than-expected inflation figures and a decline in dairy prices have seen the governor pause to assess the impact of the hikes.

Businesses expectations of future interest rates moderated to a net 66 percent expecting increases, from a net 93 percent reading in the previous quarter.

Capacity utilisation was unchanged at 90.6 percent, while capacity as a constraint slipped to net 12 percent from net 15 percent in the June QSBO, with pressure easing in Canterbury where the country's second largest city is being rebuilt after much of it was destroyed by earthquakes in 2010 and 2011.

A net 23 percent expect costs to rise in the September survey, compared with a net 20 percent in the June survey, although businesses' outlook for cost increases in the coming quarter fell to net 21 percent from net 22 percent three months earlier. Businesses expecting an increase in average selling prices gained to a net 26 percent in September, from net 23 percent in June.

Businesses investment intentions improved during the quarter, with a net 5 percent of firms intending to invest in new buildings, from a net 1 percent in the June QSBO, while the outlook for the coming quarter for plant and machinery investment edged down to net 16 percent from net 19 percent in the previous quarter.


Suze Metherell
Tue, 07 Oct 2014
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Business sentiment fades as reality fails to match expectations