Covid-19 casts long shadow over business confidence

Tuesday, 7 July 2020

Retailers have faced increased costs as a result of Covid-19, which they are passing on to customers.

A new survey of business confidence shows the country’s economic growth may not be hit quite as badly as expected.

But the data also shows that nearly a fifth of firms had cut staff, which could translate to slowing wage growth.

According to the New Zealand Institute of Economic Research's quarterly business confidence survey, a net 37 per cent of businesses have seen their own trading deteriorate over the last three months, the lowest figure since March 2009.

’It’s not surprising, considering that the lockdown saw the economy largely ground to a halt,’' principal economist Christina Leung said.

* NZIER survey sheds light on anatomy of the business confidence collapse

Building firms are the most pessimistic, with three quarters expecting the economy to deteriorate in the coming months.

But despite any gloom about the wider economy, the NZIER said businesses’ own trading figures indicated GDP forecasts would be better than either its own or Reserve Bank forecasts.

At the moment, the data pointed to a 2 per cent drop in annual GDP for the year to June, considerably less than the 16 per cent decline the NZIER had originally predicted for June, or the Reserve Bank’s own expectation of a 22 per cent fall.

ASB Bank senior economist Jane Turner said while the survey was not as weak as expected, circumstances were highly unusual and volatile. The survey also didn’t ask how much a business’s trading was up or down.

Its own forecast predicted GDP would contract 17 per cent in the June quarter, followed by a 15 per cent rebound in the September quarter

Sentiment was also weak for the coming quarter. A net 25 per cent of firms expected lower demand for themselves and just under 60 per cent nervous about the wider economy, albeit a slight improvement from March.

Firms were increasingly putting their hiring and investment plans on hold, which Leung said was common ahead of an election but Covid-19 had added extra uncertainty.

A net 19 per cent had cut staff, and a net 28 per cent expecting to do so in the next quarter. The results pointed to no growth in employment for the year to June, Leung said.

However, there had been a sharp turnaround in the skills shortage which has plagued firms for the last decade and which appeared to have largely disappeared.

Many firms reported much greater ease in hiring both unskilled (43 per cent) and skilled staff (19 per cent).

Stephen Toplis, head of research at Bank of New Zealand (BNZ) said it did not make pretty reading.

”In short, the QSBO confirms the economic damage done,” he said.

The caution expressed by firms in the survey suggested that the underlying recovery will be slow, Toplis said.

Investment was tailing off, with a net 36 per cent of firms planning to cut back on buildings or plant and machinery in the coming year, which was having a big impact on confidence in the construction sector.

A net 75 per cent of building sector firms now expected the economy to deteriorate in the coming months.

However, not all of that gloom was Covid-related. Leung said bank finance had been getting hard to get for at least a year before the outbreak, particularly in commercial construction.

Other sectors also downbeat. Manufacturers reported a weakening in both domestic and export demand, which saw a net 9 per cent of firm cutting prices and 11 per cent anticipating they would do so.

The opposite situation was being seen in retail, which had been hit with increased costs due to social distancing and other measures. A net 11 per cent of retailers had passed on price hikes in the June quarter.

The services sector was the least pessimistic of the sectors surveyed, although a net 61 per cent of firms still expected economic conditions to get worse in the coming months.

This was despite interest rates being expected to fall further over the coming year.