Business Confidence Shows The Fragility Of Our Re-Recovery

• Business confidence is waning. Because the expected recovery in demand has disappointed. For almost two years now, firms have reported a decline in activity. Now, a smaller share of firms are feeling upbeat about the outlook. Not even the RBNZ’s dovish pivot in August has managed to boost sentiment.
• The disappointment in the here and now, plus the loss of optimism about future conditions, has sent investment intentions sharply back into decline. Conditions are simply not right for businesses to be investing or expanding.
• The economic recovery is lacking gusto. There’s a clear need for stimulatory interest rate settings. Today’s update supports a 50bps cut to the cash rate tomorrow.

For the past year, business confidence had been steadily improving. But that optimism waned over the September quarter. According to NZIER’s latest business survey, fewer firms expect brighter days ahead. Only a net 15% expect economic conditions to improve in coming months, down from a net 26%. The weakening in sentiment reflects disappointment in the expected rebound in demand.

Another theme that has continued over the past year is the weakness in firms’ own domestic trading activity. Again, a net 14% of firms reported a decline in activity over the quarter. And a net 63% of firms (greater than the long-run average) put demand as the primary constraint on their business. Firms are still holding out for the recovery. Although fewer firms are now convinced. A net 9% of firms expect own trading activity to lift in the coming quarter, down from a net 18%.

With weak activity, a deterioration in confidence, and the skies seemingly darker ahead, it was no surprise to see investment intentions fall back into decline. Last quarter we finally saw a lift in investment intentions back into positive territory after practically 13 consecutive quarters of plans to reduce investment (excluding the blip higher following the election). But it seems that move was short lived with firms now reporting a paring back in investment plans for the coming year. For plant and machinery, a net 13% of firms are now planning to reduce investment, compared to the net 8% that were planning to invest last quarter. Investment intentions are even bleaker when it comes to buildings. A net 20% of firms are planning to reduce building investment over the coming year, up from the net 8% last quarter. None of this comes as a surprise. Why invest and expand when you’re worried about demand, revenue, and profitability? That’s what we’ve heard from Kiwi businesses across the country. The conditions are simply not yet right. Talks of investment, even with the Government’s investment boost scheme, are still too early.

In the same vein, hiring remains muted. Over the September quarter, nearly a quarter of firms reported that they has slashed headcount, up from a net 12% last quarter. And looking ahead hiring intentions have virtually remained unchanged with still only a net 4% looking to hire in the coming quarter.

The Kiwi economy is underperforming, and clearly needs stimulus. More accomodative interest rate settings are required. This report supports a 50bps cut tomorrow.

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