Gloomy New Zealand firms raise risk of hard landing for economy

NEW Zealand’s economy may be headed for a hard landing after business confidence slumped in the first quarter, the NZ Institute of Economic Research (NZIER) said.

A net 25 per cent of firms are pessimistic about the outlook for the economy over the next six months, up from 2 per cent in the fourth quarter, the institute said on Tuesday (Apr 9) in Wellington in its Quarterly Survey of Business Opinion. A net 23 per cent said their own trading deteriorated in the three months to March – the weakest reading since mid-2020 during the Covid-19 pandemic.

New Zealand’s central bank has kept interest rates high to slow demand and curb inflation, and this is showing through in squeezed company profits and job cuts, the report shows. The risk is that the economy – which has contracted for four of the past five quarters – slows even further in 2024.

“The key question is whether we are headed for a soft or a hard landing,” NZIER principal economist Christina Leung told a briefing. “Previously our forecast was a soft landing for the New Zealand economy. With this release, it suggests increased risk of a hard landing.”

The Reserve Bank is expected to keep the Official Cash Rate (OCR) at 5.5 per cent tomorrow, and has previously signalled it sees no scope for cuts until 2025. Most economists are tipping a monetary easing will begin in late 2024, though NZIER expects policymakers will stay on hold until May next year.

“If we are in for a hard landing or weaker activity, then naturally if it flows through into a faster slowdown in inflation, then you would expect that that will allow the Reserve Bank to cut the OCR sooner,” Leung said.

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Today’s report contained little positive news. A net 11 per cent of firms fired workers in the first quarter and just 2 per cent expect to hire in the three months to June. A net 33 per cent expect their profits to be weaker in the second quarter and investment intentions are falling.

Profits are declining because fewer companies plan to raise prices even as costs rise, which is good news for the inflation outlook, Leung said.

Confidence lifted in the fourth quarter after the election of a centre-right government that promised to rid the economy of red tape and cut taxes.

“The post-election honeymoon is now over and the reality of a weak economy is back in the driver’s seat,” said Miles Workman, senior economist at ANZ Bank New Zealand in Wellington. “The overall vibe is a deterioration from last quarter on the activity front, with a little progress on the inflation side.” BLOOMBERG