Business confidence has officially hit the skids

Wednesday, 3 July 2024

OPINION: Its grim out there. That’s the message that is coming through loud and clear from the latest NZIER Quarterly Survey of Business Opinion.

The survey, which has been running for over two decades and is considered one of the most reliable gauges of business opinion, shows precisely how downbeat the outlook for business is.

A net 35% of firms expect a deterioration in general economic conditions, and 28% report a weakening in their own businesses.

In the building sector, two thirds of those surveyed think things are going to get worse.

Leeann Watson, chief executive of Business Canterbury, says Canterbury hasn’t bucked the trend.

Business confidence “significantly plummeted” after what was an otherwise good summer, she said, and was at its lowest levels since February 2023.

Rising costs, inflation and interest rates were challenging, as well as other baked-in costs of doing business. The previously-tight labour market had driven wage increases, and freight is more expensive, she said.

She said infrastructure - such as the crucial Ashburton Bridge upgrade - needed to be a priority, and businesses wanted more clarity from the Government about what it intended to invest in.

“Businesses in Canterbury are always optimistic. However, it’s pretty tough out there,” she said.

Whiplash

Pretty much it all points back to central bank and central Government induced whiplash. During Covid-19, both the central bank’s loose monetary policy and the Government’s expansive fiscal policy were too much for too long, meaning the resulting correction and hard 180 degree turn on interest rates.

It might seem like a long time now, but it was only in May 2022 that interest rates passed through 1.5%, a level that they had been at or below since 2016. They marched steadily upwards before stabilising at 5.5% in May of last year

Yes, it isn’t the 1980s and early 1990s with high double-digit inflation, but the household debt burdens are much higher meaning interest rates hit much harder. Those inflated asset prices — for housing in particular — are also in part due to years of cheap central bank money since the global financial crisis.

This was a recession that was deliberately engineered, according to Reserve Bank Governor Adrian Orr in late 2022. But at the last interest rate decision in May — after meetings where Orr said rate hikes were actively considered — the path away from inflation became obstructed by domestic inflation pulses that seem impervious to the Reserve Bank’s interest rate: council rates, insurance hikes and rent rises.

In other words, the economic slowdown is in full force, but the last bit of inflation is yet to be squeezed out of the system and interest rates may now be delivering diminishing returns.

These latest results have the major banks now calling more fervently for rate cuts much earlier than the Reserve Bank’s track, which currently suggest any rate cuts will be late in 2025.

A net 10% of businesses are looking at reducing staff (the highest such reading since the global financial crisis in 2009), while only 23% are looking at increasing prices — also a low figure. BNZ research reckons there is no reason to believe that figure is not going to fall further

In other words consumers are putting their wallets away, whacking revenues and profitability.

BNZ Research said the results “screams rate cuts sooner rather than later”, while Kiwibank warned that there could be more long-term damage to the economy if rates aren’t cut. Both argue that it should be sooner rather than later — KiwiBank says this calendar year.

The key question is whether the Reserve Bank will wait until inflation is officially back within the bank’s target range to start cutting rates. Given that Adrian Orr has consistently said that getting the “evil” of inflation under control is the number one job, there is no reason to believe the central bank will deviate from that path.

The Government has also made it clear that that’s what it thinks the bank’s job is.

There is always a cacophony of noises about interest rate decisions, but surveys such as the QSBO are where the sometimes abstract rubber of monetary policy hits the road of business conditions.

Businesses will be charging less, selling less and trying to attract the fewer discretionary dollars. That will in turn affect investment and employment.

Conditions are challenging, and there is little light, wherever you look — except for the hope that inflation will be officially tamed some time soon.