Business confidence continues to improve, but growth may still be sliding

While the construction sector remains under pressure, architects expect activity to bounce back strongly. Photo / Alex Burton

Business confidence improved at the end of 2019, with signs of a recovery in construction and manufacturing, although growth may continue to slide.

The Quarterly Survey of Business Opinion (QSBO) for the final quarter of 2019 showed that the general outlook for the economy remained negative, but was improving.

A net 26 per cent of businesses which took part in the survey expect the overall economy to deteriorate in the coming year, however this was an improvement from the net 35 per cent which expected a downturn in the September survey.

Across the survey - the leading indicator of its type in New Zealand - respondents were generally more positive, in particular in manufacturing.

A net 1 per cent of manufacturing businesses said they had seen improved output at the end of 2019, up from a net 27 per cent which saw a fall in output in September.

A large proportion of manufacturers also reported improving export condition compared to September.

"Although domestic demand remains soft, there has been a rebound in export demand," the New Zealand Institute of Economic Research said. The institute has been undertaking the survey since 1961.

Overall the tone of survey was more positive, but key indicators pointed to New Zealand's economic growth remaining weak at least until the end of 2019.

A net 11 per cent of businesses reported a deterioration in their own activity in the quarter, the same as in September.

While recent economic commentary suggested New Zealand's economic growth had reached a trough in the second half of 2019, NZIER principal economist Christina Leung said the QSBO suggested growth may continue to weaken for some time yet.

In late 2019 the monthly ANZ business outlook survey picked up strongly.

ANZ senior economist Miles Workman said the details of the QSBO were "a touch softer" than its own survey.

"Uncertainty remains a key theme and appears to be holding back firms from going too gung-ho on the expansion front," Workman said.

While the survey showed companies are still looking to hire staff and reporting difficulty finding the right people, investment expectations remain weak.

The balance of companies expect to reduce investment in both buildings and plant and machinery.

Meanwhile, profitability remains under pressure, as companies struggle to pass on higher costs through price increases.

A net 28 per cent of companies said profits fell at the end of 2019, around the same as three months earlier, while a net 16 per cent expect profits to drop in the coming months.

"While businesses have been increasing prices for their outputs, costs have been rising more rapidly," Westpac economist Satish Ranchhod said.

"The resulting squeeze on profits is likely to continue in the new year."

The survey suggested annual GDP growth of around 1 per cent towards the end of 2019, Leung said, but there did appear to be indicators showing that conditions were starting to improve.

"To the extent that we're seeing a stabilisation in conditions, that suggests this is as bad as it gets," Leung said.

The survey presented "downside risk" to its forecasts that the economy would grow 2 per cent through 2019.