Weakening business profitability and rising labour costs appear to be underpinning expectations that economic conditions in the months ahead are deteriorating.
While general business confidence was in the doldrums, businesses had for March quarter reported a lift in demand and expectations demand would continue.
In the latest New Zealand Institute of Economic Research (NZIER) survey of 4,300 businesses in its quarterly survey of business opinion, principal economist Christina Leung said businesses were gloomy as costs rose and profitability got squeezed.
She said business confidence had fallen sharply in the quarter to December in the wake of the new Labour-led Government taking office.
“This pessimism has carried over into the first quarter of 2018,” Ms Leung said.
Other economists were less stinging than Ms Leung, saying the survey showed confidence and activity “held up relatively well,” or improved, “but only a touch.”
Westpac senior economist Anne Boniface said after falling late last year in the wake of the change of Government, headline business confidence improved from -11 to -9 pessimism in the March quarter, still well below the +5 recorded prior to the change of Government.
“Business confidence has improved in the March quarter, but only a touch,” she said.
Volatility in the quarterly survey of business opinion has been less than we've seen in monthly surveys of business confidence, she said.
Ms Boniface said while firms were a little more upbeat about the outlook for the broader economy, they were marginally more pessimistic about the outlook for their own activity. The own activity measure eased to +16 from +17 the previous quarter, while the businesses were noticeably more positive about how their own activity had fared over the previous three months, up from +10 to +16.
She said there were some signs of moderation of inflation pressure.
“Fewer firms expect costs to increase over the next three months, with 33% of firms expecting costs to rise, down from 40% in the previous quarter,” she said.
ASB senior economist Jane Turner said the survey on activity and confidence “held up relatively well;” albeit “weak,” but it was less pessimistic than the monthly ANZ business opinion survey.
“The NZIER survey points to a modest slowdown in growth, as the uncertainty associated with a change in Government continues to weigh on near-term activity,” Mrs Turner said.
She said employment and investment intentions remained at reasonably robust levels.
“However, the construction sector does appear to be losing confidence amidst tight capacity pressures and falling profitability, and points to some risk of a sharper fall in commercial construction than we have allowed for,” she said.
NZIER's Ms Leung said the continued weak profitability appeared to be a key contributor to pessimism and businesses were not optimistic that would improve.
“Cost pressures have intensified, and businesses have not been able to fully pass these on in the form of price increases,” Ms Leung said.
She said confidence in the retail sector had been particularly weak since the new Government took office.
That was likely reflecting that a large proportion of the retail workforce was low-waged, which meant retailers were more likely to be affected by the lift in the minimum wage and the abolition of the 90-day trial for new employees; for businesses with more than 20 staff.
*Simon Hartley is senior business reporter and assistant chief reporter for the Otago Daily Times.