ANZ senior economist Miles Workman said that in better times, it could mean that the economy was on the verge of a resurgence and businesses were borrowing to invest in new plant and machinery.
“That’s not what is happening right now. What is happening right now is consistent with where we think we are in the business cycle – businesses are facing still high costs to produce goods and services, high labour costs, interest costs, transport costs, fuel costs.
“Some are still rising at a relatively healthy clip.
“Meanwhile, consumers are tightening their belts and watching pennies, they’re more choosy about where they spend their money and how much. Businesses are wearing these costs and profitability takes a hammering in that world.”
He said eventually businesses would have to readjust spending on things like staff. It was just another example of the recession the Reserve Bank had engineered, he said.
Ministry of Social Development data shows there were 13,668 more people on Jobseeker Work Ready in May than a year earlier, up 14%.
Another 2052 went on to the benefit in May.
Since then, weekly reporting data shows another 2450 signed up in June.
‘Hard to increase productivity’
ASB senior economist Mark Smith said it showed how much the non-financial corporate sector was losing.
“That is important because these firms tend to employ people and if they are losing money, if they cannot see scope for them to increase sales or prices, given we are in a policy-induced recession, it’s hard to increase productivity – that’s the key but our track record hasn’t been good. The last thing they can do is look at cost-cutting.”
He pointed to the recent quarterly survey of business opinion which showed businesses were under considerable margin pressure and looking at cutting hiring.
Treasury data also showed the corporate tax take was still well below where it was last year.
“That will flow through… which will hit the household sector.”
He said the weakness in corporate profits was why ASB had brought forward its forecast for the first official cash rate (OCR) cut to the end of this year instead of February next year.
“The other thing is the impact on wages… we’ve got a much weaker corporate sector, it’s not going to be in a position to offer wage increases to the extent it had.”
He said public sector job cuts had attracted a lot of attention but were “small beer” compared to what was happening in the wider corporate sector.
Westpac chief economist Kelly Eckhold said the Reserve Bank had seemed surprised at its last monetary policy update, that households and businesses had not adjusted more quickly to the tighter monetary environment.
He said the labour market had proven to be more resilient than the Reserve Bank had forecast, but that would have to change if activity did not pick up for businesses.
- RNZ
