Business confidence lifts as labour shortages ease - NZIER survey

Retail ranked as the most downbeat sector in the latest business survey.

The latest New Zealand Institute of Economic Research (NZIER) Quarterly Survey of Business Opinion (QSBO) shows business confidence improved further over the September quarter, although sentiment remains downbeat. On a seasonally adjusted basis, a net 53 per cent of businesses expect a worsening in general economic conditions over the coming months – down from 60 per cent in the previous quarter.

Demand remained soft, with a net 17 per cent of businesses reporting reduced activity in their own business in the September quarter. A net 14 per cent also expect weaker demand in their own business in the next quarter.

The most significant development in the September quarter survey was the sharp easing in labour shortages, said NZIER principal economist Christina Leung.

“This is particularly the case for unskilled labour, with businesses now reporting it is easy to find unskilled labour. This is a turnaround from the same time last year when over half of businesses reported difficulty finding unskilled labour.”

Shortages of skilled labour also eased further, with a much lower proportion of businesses reporting difficulty finding skilled labour compared to a year ago, she said.

This easing in labour shortages is also reflected in the continued decline in the proportion of businesses reporting finding labour as the top primary constraint on their business, with softer demand now the primary concern for businesses.

These developments suggested that higher interest rates are starting to dampen demand in the New Zealand economy. Meanwhile, the strong recovery in net migration inflows since the re-opening of international borders last year helped to alleviate labour shortages and enabled firms to bring in workers from overseas.

The combination of these factors had driven an easing in capacity pressures more broadly, Leung said.

Pricing pressures had also eased, although cost pressures remained intense.

“Despite the easing in capacity pressures, businesses are still experiencing intense cost pressures, with only a slight decrease in the proportion reporting an increase in cost pressures in the September quarter,” Leung said.

However, there had been some decrease in the proportion of businesses which raised prices over the quarter, suggesting an easing in pricing pressure.

”This softer demand environment seems to have reduced the ability of firms to pass on higher costs by raising prices.”

The data suggest the RBNZ’s monetary tightening to date is getting traction and that migration-induced labour supply is having a big impact, ANZ senior economist Miles Workman.

But while capacity and inflation indicators had improved, there were still questions around whether the economy was slowing sufficiently to get inflation down in a reasonable time frame, he said.

“If we are indeed past the worst of the slowdown, as some of today’s data might suggest, then the RBNZ may not be getting the traction it thought it was getting back in August.

A premature re-acceleration in activity and therefore inflation pressures would be a big worry for the RBNZ, he said.

The survey painted a picture of subdued economic conditions through the latter part of the year, said Westpac senior economist Satish Ranchhod.

“But even though economic activity is cooling, inflation pressures are easing only gradually. That reinforces our expectations that the RBNZ will retain a tightening bias at its policy review tomorrow.”

Retailers most downbeat

The retail sector remained the most downbeat across the sectors surveyed, with a net 66 per cent of retailers surveyed expecting general economic conditions would deteriorate over the coming months.

“This pessimism reflects the weaker demand environment in the economy as households grapple with higher living costs and interest rates,” Leung said.

“Softer demand means retailers have been less able to raise their prices in the September quarter, while the proportion of retailers reporting higher costs also increased.”

With around half of mortgages in New Zealand due for repricing within 12 months’ time, many households would be refixing at much higher mortgage rates of around 7 per cent or higher, Leung said.

“We expect this significant increase in mortgage repayments will drive a further slowing in retail spending over the coming year, which should weigh on profitability for retailers.”

Manufacturers were also feeling downbeat, with the proportion of manufacturers expecting a deterioration in the economic outlook staying at a level similar to the previous quarter.

While fewer manufacturers reported increased cost and pricing pressures, the weaker export demand has reduced hiring appetite among them, the survey showed.

The building sector had also reduced hiring due to weaker demand, intense cost pressures and limited ability to raise prices.

The weaker demand facing the building sector is reflected in the architects’ measure of work in their own office, which showed a continued decline in the pipeline of housing, commercial and Government construction work for the coming years, Leung said.

The services sector was less pessimistic compared to the other sectors surveyed.

The proportion of services sector firms expecting weaker economic conditions over the coming months had also decreased from the level seen in the previous quarter. Hiring in the services sector remained robust despite reduced activity in the sector.

The upcoming election was adding to businesses’ caution around investment, Leung said.

“Businesses remain cautious when it comes to investing in buildings, plant and machinery over the coming year. The upcoming general election will also add to this caution amongst businesses, as the uncertainty over the election outcome means businesses tend to hold off on investment plans.”