QSBO shows a continued deterioration in business confidence, Quarterly Survey of Business Opinion - July 2024

New Zealand Institute of Economic Research (Inc) 
Media release, 2 July 2024

NZIER Quarterly Survey of Business Opinion 
Embargoed until 10 am 2 July 2024

NZIER’s QSBO shows a continued deterioration in business confidence
The latest NZIER Quarterly Survey of Business Opinion (QSBO) points to a further decline in business confidence in the June quarter as higher interest rates continue to dampen demand across the New Zealand economy. A net 35 percent of firms expect a deterioration in the general economic outlook over the coming months on a seasonally adjusted basis.
Firms’ own trading activity also weakened. A net 28 percent of firms reported a decline in activity in their own business in the June quarter, which was up from the 24 percent seen in the previous quarter. Overall, these results suggest the potential for a continued slowing in the New Zealand economy over the coming year on the back of higher interest rates and heightened uncertainty.

The building sector remains the most downbeat

The weakening in confidence was pervasive across the sectors surveyed, and the building sector remained the most downbeat sector. A net 65 percent of the building sector firms surveyed expect a worsening in the general economic outlook. With weak demand across housing, commercial, and government construction work, prices in the construction sector remain under pressure while costs remain intense. 

The manufacturing sector was also very downbeat, with a net 63 percent of manufacturers expecting a deterioration in general economic conditions over the coming months. Domestic demand for the sector remains weak, largely due to the weaker construction demand. This continued to reduce the pricing power of manufacturers, which has driven further deterioration in profitability for the manufacturing sector. 

The services sector and the retail sector have also seen a marked drop in their sentiment. The pessimism about the general economic outlook amongst services sector firms increased. This was despite the significant turnaround in the proportion of firms expecting interest rates to fall in a year’s time. The increased pessimism in the retail sector continues to be driven by the weak demand given the headwinds facing the household sector. Profitability in the retail sector remains weak as retailers’ pricing power has reduced significantly while there’s intensified pressure on costs. With around 60 percent of mortgages due for repricing within the coming 12 months and the softening labour market, we expect these developments will weigh on consumer confidence and retail spending over the coming year.

Caution over hiring and investment built up significantly

This environment of higher interest rates and heightened uncertainty about the outlook has made businesses much more cautious about hiring and investment. 

A net 35 percent of firms plan to reduce investment in buildings, while a net 27 percent plan to reduce investment in plant and machinery over the coming year. Many firms are holding off on investment until they feel more certain about when demand will recover. 

Meanwhile, a quarter of firms reported they had reduced staff numbers in the June quarter in the face of weak demand. This softer labour demand and the increased labour supply since the reopening of international borders continued to drive the easing in labour shortages. It is now easier for firms to find both skilled and unskilled labour. 

Weak demand has been the dominant factor driving the reduction in capacity pressures in the New Zealand economy, with weak demand increasingly being the key concern for businesses. Over 60 percent of firms are now reporting lack of sales as the primary constraint on their business, which was a significant increase from the 42 percent of firms which reported that as the primary constraint on their business a year ago.

Weak demand drives significant easing in pricing pressures

The decline in cost and pricing indicators suggests a further easing in inflation in the New Zealand economy. Pricing power is particularly weak in the building and manufacturing sectors, given the weak domestic demand.
The easing in these indicators suggests higher interest rates are continuing to gain traction in reining in inflation in the New Zealand economy. We continue to forecast annual CPI inflation to ease back towards the Reserve Bank’s 1 to 3 percent inflation target band in the second half of this year and to reach the 2 percent mid-point in a year’s time.

For further information, please contact:
Christina Leung
Deputy Chief Executive (Auckland) & Head of Membership Services 
Ph +64 21 992 985 | Email christina.leung@nzier.org.nz

Background
The New Zealand Institute of Economic Research has conducted its Quarterly Survey of Business Opinion since 1961. It is New Zealand’s longest-running business opinion survey. Each quarter we ask around 4,300 firms about whether business conditions will deteriorate, stay the same, or improve. The responses yield information about business trends much faster than official statistics and act as valuable leading indicators about the future state of the New Zealand economy. Long term series derived from the survey are held at the NZIER and are available to NZIER members via our website at www.nzier.org.nz.