Economic pessimism deepens

Business confidence is at its weakest in more than 60 years, according to the latest Quarterly Survey of Business Opinion conducted by the NZ Institute of Economic Research (NZIER).

The study for the December quarter shows a net 73 per cent of businesses, on a seasonally adjusted basis, expect general economic conditions to deteriorate over the coming months.

When it comes to activity in their own business, a net 13 per cent of companies reported a decline in activity over the past quarter. 

This was the weakest since June 2020 survey when the full impact of the first Covid-19 lockdown was captured.

Christina Leung, principal economist, says the latest NZIER survey was conducted between November 28, 2022, and January 9,  2023.

“The survey results show firms have become much more cautious and are now looking to reduce staff numbers and pare back on investment plans,” she explains. 

“However, shortages of skilled and unskilled staff remain acute despite the decline in hiring, with finding labour remaining the top primary constraint for businesses. 

“That said, a growing proportion of firms are also starting to report sales as the primary constraint for their business, suggesting weakening demand is beginning to impact more businesses.”

Leung, pictured, adds the survey shows that despite a greater proportion of businesses passing higher costs on by increasing their prices, profitability has weakened. 

“Nonetheless, the pick-up in costs and prices points to high inflation persisting into 2023.”

The building sector emerged from the study as the most pessimistic of those surveyed, with a net 77 per cent of businesses bracing for worsening economic conditions. 

The retail industry is also feeling downbeat and a net 76 per cent of retailers are expecting economic conditions to worsen in the short term. 

“The weaker demand is limiting the ability of retailers to increase prices in the face of intense cost pressures, which has reduced profitability in the retail sector,” says Leung. 

“With almost half of mortgages due for repricing over the coming year, many of those mortgages will be rolling off historically low fixed-term mortgage rates of around two to three per cent onto significantly higher rates of six to seven per cent. 

“Consequently, substantially higher mortgage repayments should drive a slowing in retail spending over the coming year.”