Politics and inflation worries take shine off improved NZIER business confidence results

Business confidence rose sharply in final three months of 2023. Photo / Alex Burton

Economists are viewing the strong uptick in business confidence in the final three months of 2023 with more caution than optimism.

A net 10 per cent of businesses surveyed in the December quarter expected economic conditions to worsen over the next year, according to the New Zealand Institute of Economic Research’s (NZIER) Quarterly Survey of Business Opinion (QSBO).

This was an improvement from the September quarter, when a net 49 per cent (on a seasonally adjusted basis) saw conditions worsening.

As for their own activity, a net 6 per cent of firms reported an increase in their own trading activity in the December quarter. This was the strongest reading since 2021, and was only just below the long-term average.

So, why is this not a simple good news story of an economy recovering from a pandemic?

The Reserve Bank is trying to use high interest rates to dampen economic activity to cool inflation.

If businesses experience too much of an uptick in demand from their customers, they could keep lifting their prices by more than what the Reserve Bank deems desirable to get inflation back in its box.

The longer it takes for inflation to abate, the longer indebted households and businesses need to endure high interest rates.

To complicate matters, the improvement in businesses’ outlooks - particularly in the retail sector - comes on the back of record-high immigration, as well as tourism growth.

So, the relative busyness experienced by some businesses may be the result of there simply being more people in New Zealand than there were a year ago, rather than due to individuals feeling good and shopping more.

Businesses surveyed by the NZIER were aware of this. Indeed, more than half said sales was the primary constraint on their businesses in the December quarter.

Previously, finding the right staff was the big issue.

Labour shortages had hampered businesses’ abilities to supply what customers were demanding. They also meant sought-after employees were able to secure higher wages. These factors pushed up inflation.

Now that immigrants are better helping fill skill shortages, constrained supply in the economy is less of a problem.

So, while immigrants are buoying economic activity overall, high mortgage rates continue to hamper households’ abilities to spend and businesses’ desires to invest - hence the reason businesses now see demand-side factors challenging their businesses more than supply-side factors.

Looking ahead, the key question is, will the support immigrants are giving the supply side of the economy be strong enough to counter the inflation that comes with more people demanding things in the economy?

BNZ’s head of research Stephen Toplis thought so, but warned the Reserve Bank might still be worried about inflation falling too slowly.

He didn’t see the NZIER’s survey results causing the Reserve Bank to deviate from its plan to keep interest rates elevated through 2024.

The other reason the rebound in business confidence isn’t a straightforward good news story is that the results are somewhat skewed by politics.

ANZ chief economist Sharon Zollner pointed to NZIER research, which shows that since the 1970s, business confidence has been an average of 27 points higher under National-led governments than under Labour-led ones.

Nonetheless, businesses’ accounts of their own trading activity has only been 2 points higher under National-led governments.

Toplis believed businesses’ improved spirits in the December quarter were likely as much due to them hoping a change of government would deliver better outcomes, as they were a result of businesses truly expecting the economy to improve.

Jenée Tibshraeny is the Herald’s Wellington business editor, based in the parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.