Brian Fallow: Do survey results show growth running out of puff?

Columnist·NZ Herald·

4 Oct, 2018 04:00 PM6 mins to read

Business is feeling fatigued -- but this time, lack of demand isn't the main problem.Photo / 123RF

COMMENT: The phrase "weakest for six years" is starting to crop up a bit too often for comfort in surveys of business and consumer sentiment.

This week's quarterly survey of business opinion (QSBO) from the New Zealand Institute of Economic Research found that a scant net 0.4 per cent of firms reported increased demand for their goods or services over the past three months, the weakest reading for six years.

It is consistent with economic growth slowing to around a 2 per cent annual pace, from the 2.8 per cent GDP growth recorded in June. That would be at odds with the consensus among economic forecasters, reported three weeks ago, which has growth picking up to around an average 3 per cent pace over the next couple of years.

The survey's weakest reading — "headline" business confidence, or firms' view of the general business situation over the coming six months — is at a net 30 per cent negative, back at levels last seen during the depths of the recession in 2009.

That can safely be ignored. It reflects no more than business leaders' tendency to look at the economy through blue-tinted spectacles.

Over the nearly 50-year history of the QSBO, their view of the economy has run some 20 percentage points darker than their view of their own firms' prospects. The gap is markedly wider (about 30 percentage points) when Labour is in power than National, regardless of how the economy is actually doing.

But usefully, NZIER this time asked businesses what they saw as the key issues affecting the general business situation over the next six months. They were allowed more than one.

Government policy was most often cited, especially by respondents who consider the general business situation is getting worse.

But labour costs, consumer confidence, the availability of labour and profit margins were all selected by half or more of the respondents.

Unsurprisingly, labour costs were the most important factor for manufacturers and builders, while consumer confidence was the most important for retailers.

When it comes to the questions about which respondents are authoritative — their own experience and intentions here and now — the survey found a continuing deterioration in profitability and a higher proportion of firms reporting their costs had increased than their selling prices.

Firms' reported hiring over the past three months lurched lower, again to a six-year low.

If that is reflected in the "hard data" (Statistics NZ's labour market report due in a month) it will be a stark departure from the recent trend of strong employment growth — 3.7 per cent over the year ended June 2018.

Meanwhile, the Westpac McDermott Miller quarterly survey of consumer confidence also fell sharply in September, to its lowest level in six years.

A net 5 per cent of households expect their own financial circumstances to deteriorate over the next year, the lowest reading — outside of actual recessions — for that indicator in the history of the survey.

The associated survey of employment confidence found that the number of households expecting their earnings to increase over the coming year is languishing at the sorts of lows last seen during the financial crisis, Westpac says.

Yet the QSBO continues to report readings for the difficulty of finding skilled workers at levels which would point — if history is any guide — to wage increases at rates not seen since the recession.

The net balance of firms saying they expect to increase investment in plant and machinery is barely positive, though that still puts it ahead of the long-run average for that indicator. The rear view mirror — in this case, June quarter gross domestic product data — showed business investment in plant, machinery and equipment 7 per cent ahead of the same period last year.

The key finding from this survey is the confirmation that the negativity in business sentiment is not being driven primarily by expectations of weakening demand.
Stephen Toplis, BNZ

Firms' expectations of demand for their wares over the coming three months are more optimistic than their reported experience of the past three and, at a net 10 per cent positive, held up at a level not too far short of the long-run trend for that indicator (a net 15 per cent positive).

The Bank of New Zealand's head of research, Stephen Toplis, takes the glass-half-full view: "For us the key finding from this survey is the confirmation that the negativity in business sentiment is not being driven primarily by expectations of weakening demand. Rather it is a combination of rising input costs and frustration with both Government policy and the inability to find staff that is putting confidence under pressure.

"This being the case, one would expect business sentiment to be a less effective indicator of activity than it might have been in the past." Toplis does, however, see it as a harbinger of mounting inflation, pointing not only to the reported tightness in the labour market, but also the fact that a net 44 per cent of respondents reported their costs rose in the quarter, the highest for 10 years. "Businesses cannot accept falling margins forever."

So he does not expect the Reserve Bank to be lowering interest rates any time soon. "We would not go so far as suggesting they will be tightening either, but feel that the possibility should not be discounted."

ANZ economist Liz Kendall, on the other hand, expects firms to pass on cost increases like higher fuel prices cautiously and for it to have only a transitory effect on inflation.

She sees the QSBO as consistent with softening in GDP growth and as casting doubt on the Reserve Bank's expectation in the August monetary policy statement that annual GDP growth will accelerate form here and as providing a timely reminder that official cash rate cuts remain a distinct possibility.

Westpac economist Anne Boniface think the QSBO will have done little to assuage Reserve Bank concerns that downside risks to the growth outlook remain and will leave it comfortable with its dovish view on the outlook for monetary policy.

ASB economist Jane Turner said the business confidence figures were concerning. "But they are not hard data," she said.

"If the growth and employment figures released over the rest of the year are consistent with soggy business confidence, we see it becoming increasingly likely that the Reserve Bank will pull the trigger and possibly cut the OCR early next year."