New Zealand firms are downbeat on economy, sales as growth slows

NEW Zealand companies are pessimistic about the outlook for the economy, and their own trading prospects, as slowing growth damps demand for their goods and services.

A net 59 per cent of firms expect the economy will worsen, the New Zealand Institute of Economic Research (NZIER) said on Tuesday (Jul 4) in Wellington, citing its second-quarter survey of business opinion. A net 13 per cent said their own trading had slowed in the period, and 17 per cent expect a deterioration in the three months through September.

Activity is slowing as high-interest rates weigh on demand, and while economists expect the nation will emerge from recession in the current quarter, many expect it will quickly stumble into another one.

The Reserve Bank of New Zealand (RBNZ) in May raised its Official Cash Rate to 5.5 per cent – having hiked by 5.25 percentage points since October 2021 – and signalled the end of its tightening cycle. The RBNZ expects that weaker demand will start to reduce inflation pressures.

“There are signs that the impact of higher interest rates is gaining traction in the economy,” NZIER principal economist Christina Leung said. “We are seeing that softer demand picture coming through.”

Demand is increasingly becoming a constraint on businesses, Leung said. The survey showed 42 per cent of firms cited slow sales as the biggest factor limiting their ability to expand. By contrast, just 25 per cent cited labour as their biggest constraint.

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Cooling activity is seeing capacity pressures ease and the difficulty of finding labour decline. A net 10 per cent of firms reported trouble finding unskilled workers, down from 37 per cent in the first quarter.

Cost pressures persist with 70 per cent of respondents saying they had risen in the quarter. Still, fewer expect to raise prices in the third quarter, Leung said.

“This should give the RBNZ a degree of confidence things are moving in the right direction,” she said. “The RBNZ won’t need to increase further in this cycle.” BLOOMBERG