NZIER’s QSBO shows a modest increase in business confidence and continued easing in capacity pressures, July 2023
July 4, 2023
New Zealand Institute of Economic Research (Inc) Media release, 4 July 2023 NZIER Quarterly Survey of Business Opinion
Embargoed until 10 am 4 July 2023
The latest NZIER Quarterly Survey of Business Opinion shows business confidence continued to pick up over the June 2023 quarter but from low levels. On a seasonally adjusted basis, a net 59 percent of businesses expect deterioration in general economic conditions over the coming months.
However, firms’ own trading activity remains subdued, with a net 13 percent reporting reduced activity in the June quarter on a seasonally adjusted basis. Also, an increased proportion of businesses expect activity in their own activity to decline in the next quarter.
Capacity pressures eased, but cost pressures are still intense
While demand continues to soften, the marked decline in capacity utilisation amongst builders and manufacturers and the proportion of firms reporting difficulty in finding labour, especially unskilled labour, point to a considerable easing in capacity pressures in the New Zealand economy. The easing in capacity pressures is also reflected in the continued increase in the proportion of firms reporting sales as the primary constraint on their business and the continued decline in those reporting finding labour as their primary constraint. This indicates that softer demand is increasingly becoming a key concern of businesses as the impact of interest rates is gaining more traction in the New Zealand economy.
However, cost pressures for firms intensified over the June quarter compared to the previous quarter. Meanwhile, the proportion of firms which increased their prices remained roughly the same. But with a weaker outlook for demand, a smaller proportion of firms expect to increase their prices in the next quarter. This suggests that the weakening demand is having some impact on inflation pressures, as it limits the extent to which firms can increase prices.
Retailers are the most downbeat
The retail sector was the most downbeat in the June quarter, with a net 64 percent of retailers surveyed expecting a worsening in the general economic outlook. While cost and price pressures are falling, this environment of weaker demand is weighing on the sentiment of retailers. With around half of mortgages due for repricing over the coming year, we expect a further slowing in retail spending as the significant increase in mortgage repayments crowds out discretionary spending.
Manufacturing and services sectors were also feeling downbeat. Cost pressures have increased for both sectors, which is weighing on their profitability. The weaker demand in the services sector is also weighing on the sentiment of services sector firms.
Confidence in the building sector has improved in the June quarter, although from a low level. A net 59 percent of the building sector expected a weaker outlook for the coming months. Cost and pricing pressures have eased markedly in the building sector, but profitability further deteriorated as demand softened. The weaker demand facing the building sector is also reflected in the architects’ measure of work in their own office. This is particularly for the measure of the pipeline of residential construction work over the coming year, which declined further in the June quarter. The pipeline of Government construction work is also starting to ease.
Firms are slightly more cautious about investment
A small proportion of firms increased their headcount in the June quarter, indicating that hiring remained fairly robust. However, firms have become more cautious about investment, especially regarding investment intentions for plant and machinery over the coming year. We expect uncertainty around the upcoming election will likely weigh on investment intentions, especially in this environment of weaker demand.