While the results were gloomy across all sectors they did point to further easing in inflation, she said.
“The decline in cost and pricing indicators suggests a further easing in inflation in the New Zealand economy. Pricing power is particularly weak in the building and manufacturing sectors, given the weak domestic demand.”
“The easing in these indicators suggests higher interest rates are continuing to gain traction in reining in inflation. We continue to forecast annual CPI inflation to ease back towards the Reserve Bank’s 1 to 3% inflation target band in the second half of this year and to reach the 2% mid-point in a year’s time.”
Bank economists also saw the results as heartening for the Reserve Bank (RBNZ).
“Today’s results are hugely encouraging for the RBNZ,” said ASB senior economist Mark Smith.
“OCR [official cash rate] cuts before year-end remain a distinct possibility. Our OCR call is under review.”
ANZ senior economist Miles Workman described the data as another step in the right direction for the RBNZ.
It confirmed that “monetary tightening is working,” he said.
“We remain very comfortable that the RBNZ will be cutting considerably earlier than signalled in the May MPS.”
KiwiBank also said rate cuts would be needed sooner.
“Enough is enough. The risk here is severe economic scarring, from overly restrictive monetary policy,” said chief economist Jarrod Kerr.
It retained its November call for the first cut.
BNZ head of research Stephen Toplis said the survey showed inflation had been “beaten”.
“In our humble opinion, today’s Quarterly Survey of Business Opinion (QSBO) screams cut rates sooner rather than later,” Toplis said.
Gloomy across the board
While weakening in confidence was pervasive across the sectors surveyed, the building sector remained the most downbeat sector, Leung said.
A net 65% of the building sector firms surveyed expected a worsening in the general economic outlook.
“With weak demand across housing, commercial, and government construction work, prices in the construction sector remain under pressure while costs remain intense,” Leung said.
The manufacturing sector was also very downbeat, with a net 63% of manufacturers expecting a deterioration in general economic conditions over the coming months.
Domestic demand for the sector remained weak, largely due to the weaker construction demand. This continued to reduce the pricing power of manufacturers, which had driven further deterioration in profitability for the manufacturing sector, Leung said.
The services sector and the retail sector also saw a marked drop in sentiment.
“This was despite the significant turnaround in the proportion of firms expecting interest rates to fall in a year’s time,” Leung said.
The increased pessimism in the retail sector continued to be driven by the weak demand given the headwinds facing the household sector.
“Profitability in the retail sector remains weak as retailers’ pricing power has reduced significantly while there’s intensified pressure on costs. With around 60% of mortgages due for repricing within the coming 12 months and the softening labour market, we expect these developments will weigh on consumer confidence and retail spending over the coming year.”
This environment of higher interest rates and heightened uncertainty about the outlook had made businesses much more cautious about hiring and investment, she said.
A net 35% of firms planned to reduce investment in buildings, while a net 27% planned to reduce investment in plant and machinery over the coming year.
Many firms were holding off on investment until they felt more certain about when demand would recover.
Meanwhile, a quarter of firms reported they had reduced staff numbers in the June quarter in the face of weak demand.
This softer labour demand and the increased labour supply since the reopening of international borders continued to drive the easing in labour shortages, Leung said.
“It is now easier for firms to find both skilled and unskilled labour.”
Weak demand had been the dominant factor driving the reduction in capacity pressures in the New Zealand economy, with weak demand increasingly being the key concern for businesses.
Over 60% of firms were now reporting a lack of sales as the primary constraint on their business, which was a significant increase from the 42% of firms which reported that as the primary constraint on their business a year ago.
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.
