The latest NZIER Quarterly Survey of Business Opinion (QSBO) shows a marked improvement in business confidence in the September quarter. A net 5% of firms expect a deterioration in general economic conditions over the coming months on a seasonally adjusted basis. This is a significant drop from the net 40% of firms feeling downbeat in the June quarter.
A net 31% of firms reported a decline in activity in their own business in the September quarter. Meanwhile, only a net 2% of firms are expecting weaker activity in the next quarter. The start of the easing cycle in the OCR by the Reserve Bank of New Zealand (RBNZ) since the August Monetary Policy Statement and expectations of lower interest rates for the coming year appear to have supported this sharp improvement in sentiment about the outlook ahead, despite demand remaining weak for now.
Retailers are feeling most positive about the outlook ahead
The improvement in sentiment is most evident in the retail sector. Despite orders, sales and profitability remaining weak in the September quarter, a net 13% of retailers surveyed are feeling positive about the general economic outlook for the coming months. A net 8% of retailers are also expecting domestic demand to improve in the next quarter.
A small proportion of services sector are also feeling positive about the general economic outlook ahead, reflecting expectations of lower interest rates over the coming year. While the current weak demand environment has driven a further easing in the pricing power of services, sector firms and staff headcounts in the sector had reduced in the September quarter, a net 8% of services sector firms expect demand to pick up in the next quarter. This optimism in the retail and services sectors reflects the expectations that the impact of lower interest rates will be felt more in the household sector.
In contrast, the manufacturing sector was the most downbeat, with a net 37% of the manufacturers surveyed feeling pessimistic about the general economic conditions over the coming months. This pessimism continues to be driven by the weak demand and profitability facing the manufacturing sector. However, a significant proportion of manufacturers are expecting a recovery in demand in the coming quarter.
The building sector was also downbeat, although to a much lesser extent compared to the June quarter. The weak demand facing the building sector continued to reduce firms’ pricing pressures while cost pressures remain intense, resulting in a further deterioration in profitability. The measure of architects’ work in their own office points to continued weakness in the pipeline across housing, commercial and government construction work for the 12 months ahead. This is in line with the consent issuance data, which also suggests a soft pipeline of construction demand over the coming year.
Pricing pressures eased sharply in this weak demand environment
There was a slight increase in the proportion of firms reporting higher costs in the September quarter. However, the pricing indicator shows that only a net 3% of firms were able to raise prices to pass on costs, which was a sharp fall from the net 23% in the previous quarter.