Business confidence leaps, but are bosses kidding themselves?

Wednesday, 17 January 2024

A survey indicating a big improvement in business confidence should be treated with caution, given the economic outlook, some business leaders say.

Businesses, especially retailers, have become much more confident about future trading conditions, according to the New Zealand Institute of Economic Research’s (NZIER’s) quarterly survey of business opinion, published on Tuesday.

That was despite a Treasury forecast in December which said the economy would grow by a lacklustre 1.5% annually over the next two years, and sparked a warning from Capital Economics of a possible “double-dip recession”.

In the NZIER survey, a net 44% of retailers expected an improvement in general economic conditions over the next six months, versus a net 66% expecting worsening conditions in its previous survey.

NZIER principal economist Christina Leung said that turnaround was “a bit surprising” given there were signs retail spending would slow as more households were forced to refix mortgage repayments at higher interest rates.

Overall, a net 10% of businesses were still expecting a deterioration in general economic conditions over the next six months. But that was a sharp improvement on the 49% expecting a deterioration at the time of its previous survey.

A net 6% of firms reported increased activity in the December quarter, and a net 5% were expecting their own business would perform better over the following three months.

Employers and Manufacturers Association (EMA) chief executive Brett O’Riley said one swallow did not make a summer.

The EMA was still seeing “a record amount of restructuring activity”, and was closely watching the impact of supply chain disruptions stemming from the Red Sea conflict and the drought restricting traffic on the Panama canal, he said.

“I think businesses are being very cautious around investment at the moment.”

O’Riley believed it was probably the case that NZIER’s survey reflected an unusually strong degree of political relief among business leaders at the election result in October.

“Businesses had become very frustrated with the previous government over a range of issues from employment relations to law and order,” he said.

The association noted last month that confidence appeared to have improved, but its head of advocacy Alan McDonald questioned then how sustainable that might prove.

O’Riley said the EMA would be “keenly looking to see what are the policies that are going to help grow the economy”, but it was encouraging the Government appeared intent on hitting the ground running.

He was touring Central Otago cherry orchards with a delegation of Chinese investors, and said there was renewed interest in opportunities after a couple of years when “a lot of international investors felt New Zealand was closed for business”.

Retail NZ chief executive Carolyn Young agreed the confidence survey might be reflecting “hopefulness among business owners about what they would see a right-of-centre government do, compared to a left-of-centre one”.

The association would be publishing a survey of its members’ sentiment later this month and it would be interesting to see if that aligned, she said.

Retailers might be banking on a change in economic priorities resulting in a quicker recovery from inflationary pressures, and in the NZIER survey might have responded to welcome reforms, such as the resumption of “90-day” employee trials and the repeal of the Fair Pay Act, Young said.

About 10,000 chief executives or their nominees were polled between November 24 and January 9.

Leung said businesspeople tended to be more optimistic when the National Party was in government.

But she did not believe they were necessarily deluding themselves about the economic outlook after a contentious election.

NZIER’s survey pointed to a reasonably strong bounce-back in economic activity after a 0.3% drop in GDP reported by Stats NZ in the September quarter, she said.

“Elections are always polarising. I don’t think this one was particularly different.”

NZIER’s questions asked businesses how they felt, she said. “Sure, sometimes it doesn't live up to expectations in terms of activity, but that's the question being asked.”

ANZ said the survey suggested the economy unexpectedly got some wind in its sails towards the end of last year.

The Reserve Bank would be pleased to see a decline in inflation expectations, but wary that the economy might be getting a second wind before its job fighting inflation was done, it said.