NZIER’s QSBO shows improved business confidence as interest rates ease, Quarterly Survey of Business Opinion - October 2024

New Zealand Institute of Economic Research (Inc)
Media release, 1 October 2024

NZIER Quarterly Survey of Business Opinion
Embargoed until 10 am 1 October 2024

NZIER’s QSBO shows improved business confidence as interest rates ease

The latest NZIER Quarterly Survey of Business Opinion (QSBO) shows a marked improvement in business confidence in the September quarter. A net 5 percent of firms expect a deterioration in general economic conditions over the coming months on a seasonally adjusted basis. This is a significant drop from the net 40 percent of firms feeling downbeat in the June quarter.

The measure of firms’ own trading activity points to continued weakness in demand, with a net 31 percent of firms reporting a decline in activity in their own business in the September quarter. Meanwhile, only a net 2 percent of firms are expecting weaker activity in the next quarter. The start of the easing cycle in the OCR by the Reserve Bank of New Zealand (RBNZ) since the August Monetary Policy Statement and expectations of lower interest rates for the coming year appear to have supported this sharp improvement in sentiment about the outlook ahead, despite demand remaining weak for now.

Retailers are feeling most positive about the outlook ahead

The improvement in sentiment is most evident in the retail sector. Despite orders, sales and profitability remaining weak in the September quarter, a net 13 percent of retailers surveyed are feeling positive about the general economic outlook for the coming months. A net 8 percent of retailers are also expecting domestic demand to improve in the next quarter.

A small proportion of services sector are also feeling positive about the general economic outlook ahead, reflecting expectations of lower interest rates over the coming year. While the current weak demand environment has driven a further easing in the pricing power of services sector firms and staff headcounts in the sector had reduced in the September quarter, a net 8 percent of services sector firms expect demand to pick up in the next quarter. This optimism in the retail and services sectors reflects the expectations that the impact of lower interest rates will be felt more in the household sector.

In contrast, the manufacturing sector was the most downbeat, with a net 37 percent of the manufacturers surveyed feeling pessimistic about the general economic conditions over the coming months. This pessimism continues to be driven by the weak demand and profitability facing the manufacturing sector. However, a significant proportion of manufacturers are expecting a recovery in demand in the coming quarter.

The building sector was also downbeat, although to a much lesser extent compared to the June quarter. The weak demand facing the building sector continued to reduce firms’ pricing pressures while cost pressures remain intense, resulting in a further deterioration in profitability. The measure of architects’ work in their own office points to continued weakness in the pipeline across housing, commercial and Government construction work for the 12 months ahead. This is in line with the consent issuance data, which also suggests a soft pipeline of construction demand over the coming year.

Pricing pressures eased sharply in this weak demand environment

There was a slight increase in the proportion of firms reporting higher costs in the September quarter. However, the pricing indicator shows that only a net 3 percent of firms were able to raise prices to pass on costs, which was a sharp fall from the net 23 percent in the previous quarter. The reduction in pricing power was particularly evident in the building, manufacturing and retail sectors. The change in firms’ price-setting behaviour was highlighted by the RBNZ as a key factor providing them the comfort that inflation was easing enough to warrant them in commencing an easing cycle in the OCR.

These developments suggest that the earlier interest rate increases are continuing to have their intended impact of dampening demand and reducing capacity pressures, which are driving a further easing in inflation pressures in the New Zealand economy. The easing in capacity pressures is particularly evident in the continued sharp turnaround in labour shortages, with significant proportions of firms now reporting it easy to find skilled and unskilled labour. Many firms also reduced their staff numbers in the September quarter. These results point to increased slack in the labour market. Given the labour market tends to lag broader economic activity, we forecast a further increase in the unemployment rate.

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.