Optimism grows, but demand remains weak
The NZIER Quarterly Survey of Business Opinion (QSBO) revealed improved business confidence in the September quarter, as firms anticipate lower interest rates.
While a net 5% of firms still expect weaker economic conditions, this is a significant improvement from the 40% in the June quarter.
However, Christina Leung (pictured top left), NZIER’s deputy chief executive, noted that “demand remains weak, with 31% of firms reporting a decline in activity.”
Although sentiment has improved, firms are still cautious about immediate growth prospects.
Retailers expect demand to pick up
The retail sector has shown the most optimism, with 13% of retailers expecting an improved economic outlook in the coming months.
Lower interest rates are expected to drive consumer demand, which has been sluggish in recent quarters.
“Retailers are feeling the benefits of an anticipated easing in financial conditions,” Leung said.
However, the construction and manufacturing sectors remain cautious, with many firms still grappling with weak demand and shrinking profitability.
Continued softness in economic activity
Westpac senior economist Satish Ranchhod (pictured top right) acknowledged the improvement in confidence but stressed that business activity remains subdued.
“The latest survey shows a recovery in confidence back to pre-pandemic levels,” Ranchhod said, but added that trading activity continues to decline, with the domestic trading gauge falling to -30.8.
“Firms are still dealing with weak demand, and employment levels have also dropped,” the Westpac economist said, reinforcing the expectation of a further contraction in GDP for the September quarter.
Modest improvement, but recessionary conditions persist
ASB chief economist Nick Tuffley (pictured bottom left) highlighted that while business confidence has improved, the economy remains weak.
“We’re seeing some improvement in metrics from the dire readings of Q2, but activity is still consistent with recessionary conditions,” Tuffley said.
He pointed out that demand is the major constraint on growth, with firms cutting prices to attract customers despite cost pressures.
“Construction and manufacturing remain pessimistic, with many firms reducing investment and employment,” he said.
Easing capacity pressures signal reduced inflation risk
Kiwibank senior economist Mary Jo Vergara (pictured bottom right) noted that capacity pressures in the economy have eased, reducing inflation risks.
“Pricing pressures have dropped substantially, with only 3% of firms raising prices in Q3, down from 23% in Q2,” Vergara said.
Labour shortages have also become less of an issue, as firms find it easier to hire skilled and unskilled workers.
“This shift is a clear sign that inflation will continue to ease, but the RBNZ must deliver more rate cuts to support businesses through this challenging period,” Vergara said.
Construction and manufacturing sectors still struggling
Despite the improved outlook, sectors like construction and manufacturing remain pessimistic. The building sector faces weak demand and cost pressures, leading many firms to cut prices.
“The pipeline of construction work looks soft, with architects reporting continued weakness in both commercial and residential projects,” Leung said.
Meanwhile, manufacturers continue to face profitability challenges, although some expect a recovery in demand in the next quarter.
More easing needed to sustain recovery
The general consensus among economists is that interest rate cuts will support a gradual recovery, but more easing may be required.
“The RBNZ’s cuts are beginning to boost confidence, but the economy is still struggling,” Tuffley said.
Ranchhod agreed, noting that “further rate cuts will be crucial to stimulating demand and reversing the slowdown in employment.”
As businesses wait for more relief, the hope is that continued rate cuts will help drive sustained growth in 2025.
Read the NZIER report here. Also read the commentaries from Westpac, ASB, and Kiwibank.
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