Business confidence up in final quarter of 2019, despite expectations of gloom

Tuesday, 14 January 2020

Business sentiment has lifted in manufacturing in particular and overall a smaller proportion of business expected economic conditions to worsen.

Confidence among New Zealand's businesses improved slightly as 2019 drew to a close, particularly in the manufacturing sector.

NZIER's latest quarterly survey of business opinion (QSBO) found that a smaller proportion of business expected economic conditions to worsen. A net 26 per cent of businesses surveyed were downbeat on the economy, compared with a net 35 per cent in the September quarter.

'Fewer businesses are feeling downbeat but overall pessimists outnumber optimists,' said Christina Leung, principal economist at the New Zealand Institute of Economic Research said.

Manufacturing sentiment improved in particular - in that sector, 20 per cent expected worsening economic conditions over the next year, down from 52 per cent the previous quarter. The global manufacturing outlook had improved as the United States and China made headway on a trade deal late last year, and there were signs that profitability in the sector was improving.

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Christina Leung, principle economist, NZIER says pessimists outnumber optimits.

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Economic growth rose modestly in the first three months of the year, but economists are pointing to devil in the detail.

A greater likelihood of government contracts in the pipeline was boosting confidence in the construction sector. Announcements late last year of increased infrastructure spending were the likely cause.

'We asked architects what they expect for construction activity across housing, commercial and government work based on what they're doing in their own office, and it does suggest a strong rebound in government construction work over the next year,' Leung said.

Services were the most pessimistic of all sectors with 26 per cent expecting a deterioration in general economic conditions in coming months, despite a small improvement in confidence. Banks were gloomy due to increased capital requirements, which are likely to increase costs, while financial services firms expected to see further rate cuts this year.

ASB senior economist Jane Turner said a 25 basis point cut to the official cash rate was expected from the Reserve Bank in May.

'However, the timing of this cut is likely to remain data-dependent. Importantly, the RBNZ will likely want to see how the weak business confidence surveys evolve over the first half of the year,' she said.

Firms' expansion plans remained cautious, with hiring and investment tentative, driven by weak profitability. Hiring is expected to pick up again next quarter.

'There is more optimism when it comes to increasing headcount next quarter. Businesses have tended to use that more when expanding rather than committing to large scale capital investments,' Leung said.

The regions were feeling downbeat about business prospects, with only Hawke's Bay signalling greater optimism. More than 40 per cent of businesses in Gisborne, Manawatu-Wanganui, the West Coast, Tasman and Blenheim expected economic conditions to go downhill.

Firms' own reported trading activity was soft, with 11 per cent of businesses reporting weaker demand in December, suggesting annual GDP growth of around 1 per cent at the end of the year.

Westpac senior economist Satish Ranchhod said, despite sluggish trading in the final months of 2019, businesses were more upbeat about trading conditions in the coming months.

'That's consistent with moderate GDP growth through the March quarter.'