Some businesses have been able to pass on their higher costs.
Declining business confidence and acute 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 Survey of Business Opinion for the June quarter showed business confidence had slipped to its lowest level since Covid first arrived in the country in March 2020.
Despite facing uncertainty over Covid and rising interest rates, cost pressures on businesses were intensifying, NZIER said.
ANZ economist Miles Workman and Finn Robinson said there was nothing in survey that would seem to stand in the way of the Reserve Bank raising the Official Cash Rate by 50 basis points both next week and in August, which would raise the rate from 2%, to 3%.
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“For broader economic momentum, it seems the only way from here is down. That’s not to say the economic fundamentals have suddenly broken; rather, the economy is running out of resource to grow,” they said.
A net 1% of businesses reported a decline in their own trading activity in the quarter, on a seasonally adjusted basis, to the NZIER survey.
A net 62% expected a deterioration in general economic conditions over the coming months, up from the net 34% feeling pessimistic in the previous quarter.
A reading of 0% would indicate that businesses were evenly split in their outlook.
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NZIER principal economist Christina Leung said the survey results were broadly in line with business confidence surveys conducted by ANZ but that didn’t make them less worrying.
Despite the shakier outlook for the, inflation pressures had continued to intensify, NZIER found.
“With these inflation pressures being so strong there doesn’t look to be anything in today’s release which should dissuade the Reserve Bank from it’s projected aggressive path of monetary policy tightening,” Leung said.
The services and building sectors were the most downbeat, with a net 70% of firms in the building sector expecting conditions to increase.
The pipeline of construction work was still solid and the building sector was facing acute capacity constraints stemming from a shortage of workers and materials, which was underpinning strong cost pressures, NZIER said, but the proportion of firms able to raise prices had fallen.
That was putting a further squeeze on operating margins. Finding labor and materials were the primary constraints for building sector firms, with a sharp rise in the proportion of firms reporting their stocks of raw materials were too low.
In a sign that activity in the construction could be about to drop, it said architects were reporting less work.
The services sector was also feeling much more downbeat, as increased expectations of further interest rate rises drove expectations of weaker demand ahead.
More services businesses were facing higher costs, but had been able to pass these on to consumers.
A net 61% of retailers expected conditions to get worse over the coming months and 96% reported higher costs in the June quarter.
Businesses were planning to invest less as they margins ere squeezed by higher costs.
ASB economists said the results depicted “stagflation-like” conditions, with shrinking economic activity, intense capacity pressures and soaring prices and costs.
It described the trade-offs facing the Reserve Bank as stark.
“Recession looms but ensuring inflation will eventually settle to generally acceptable levels (ie. around 1-3%) should be the Reserve Bank’s key priority.
“With inflation showing few signs of cooling and capacity pressures intense the ‘path of least regrets’ for the Reserve Bank is still to swiftly move to restrictive monetary settings.”
Kiwibank economists said the “warning bells of an impending recession” were getting louder, although it was not yet inevitable.
“A high inflation environment combined with rapidly rising interest rates are eroding profitability and confidence.”