Abigail Dougherty / Stuff
Some companies were able to pass on their higher costs.
Falling business confidence and severe capacity constraints suggest “the only way is down” for economic momentum, ANZ economists say.
The New Zealand Institute of Economic Research reported on Tuesday that its quarterly business sentiment survey for the June quarter showed business confidence slipping to its lowest level since Covid hit the country in March 2020.
Despite the uncertainty surrounding Covid and rising interest rates, cost pressures for businesses were intensifying, NZIER said.
ANZ economists Miles Workman and Finn Robinson said nothing in the survey would appear to prevent the Reserve Bank from raising the official exchange rate by 50 basis points next week and in August, which would would increase the rate from 2% to 3%.
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“For broader economic momentum, it appears the only way from here is down. This is not to say that economic fundamentals have suddenly shattered; on the contrary, the economy lacks the resources to grow,” they said. they stated.
According to the NZIER survey, a net 1% of businesses reported a decline in their own business activity in the quarter, on a seasonally adjusted basis.
A net 62% expected general economic conditions to deteriorate over the next few months, compared to a net 34% feeling pessimistic in the previous quarter.
A reading of 0% would indicate that companies were evenly split in their outlook.
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NZIER chief economist Christina Leung said the survey results were broadly in line with ANZ’s business confidence surveys, but that didn’t make them any less worrying.
Despite the more fragile outlook for the economy, inflationary pressures continued to build, NZIER found.
“With these inflationary pressures so strong, there doesn’t appear to be anything in today’s statement that should deter the Reserve Bank from its projected aggressive course of monetary policy tightening,” Leung said.
The services and construction sectors were the most depressed, with 70% of companies in the construction sector expecting conditions to worsen.
The construction works pipeline was still strong and the construction sector faced severe capacity constraints resulting from a shortage of workers and materials, which underpinned severe cost pressures, NZIER said, but the proportion of firms able to raise prices had fallen.
This weighed more heavily on operating margins. Finding labor and materials was the main constraint for companies in the construction sector, with a sharp increase in the proportion of companies declaring that their stocks of raw materials were too low.
In a sign that construction activity could be about to plummet, he said architects were reporting less work.
The services sector also felt much more depressed, as heightened expectations of further interest rate hikes pushed forward expectations of weaker demand.
More service companies faced higher costs, but were able to pass them on to consumers.
61% of net retailers expected conditions to deteriorate in the coming months and 96% reported higher costs in the June quarter.
Companies planned to invest less as their margins were squeezed by higher costs.
ASB economists said the results depicted “stagflation-like” conditions, with declining economic activity, intense capacity pressures and soaring prices and costs.
He described the trade-offs the Reserve Bank faces as stark.
“Recession is imminent, but ensuring that inflation eventually stabilizes at generally acceptable levels (i.e. around 1-3%) should be the Reserve Bank’s top priority.
“With inflation showing few signs of abating and capacity pressures intense, the ‘path of least regret’ for the Reserve Bank is still to move quickly to tight monetary settings.”
Economists at Kiwibank said the “alarm bells of an impending recession” were getting louder, although it was not yet inevitable.
“A high inflation environment combined with rapidly rising interest rates is eroding profitability and confidence.”