Business confidence slumped in March, after a post-election bounce in December.
Key results (seasonally adjusted)
- General business confidence: -23.7 (Previous: -9.9)
- Trading activity, past three months: -23.2 (Previous: +6.7)
- Trading activity, next three months: -11.5 (Previous: +6.6)
- % reporting a rise in operating costs over the past 3 months: 53.1 (Previous: 54.7)
- % who increased output prices over the past 3 months: 34.5 (Previous: 38.5)
Business confidence came back down to earth with a thud in March, after a strong bounce last December. Businesses reported much tougher conditions over the last quarter, and were downbeat on their investment and hiring plans.
We were wary of the previous quarter’s results, which may have reflected initial hopes about the election of a centre-right government (though this particular survey hasn’t shown a strong political bias in the past). The other positive factor at the time was the sense that inflation was finally easing from its highs. However, the latest survey showed that firms are finding that cost pressures have been slow to recede.
General business sentiment fell to a net -24% in March, from -10% in December. That was still an improvement on the pre-election readings of -50% or worse. However, firms’ own trading activity (which has a closer relationship with GDP growth) was sharply lower. A net 23% saw worse results over the past quarter, the weaking reading since the Covid lockdown. Expectations for the next quarter turned negative again, as they had been since mid-2022.
These results present some downside risk to our near-term GDP forecasts, where we expect some weakly positive growth (though remaining below population growth). That said, indicators of activity to date, such as the manufacturing PMI, have been more positive that what this confidence survey suggests.
A net 35% of firms reported that they had increased their prices in the last three months, down from 39% last quarter. Intentions to raise prices also receded modestly, from 36% to 32%. These results are consistent with our forecast for CPI inflation to ease further from 4.7% to 4.2% in the March quarter – albeit higher than the Reserve Bank was expecting at this point.
Capacity pressures for businesses have continued to fade. The ease of finding workers remained at its highest levels since 2010, and a lack of demand is increasingly becoming the main constraint on growth.
Even so, cost increases over the last three months remained high, and expectations ticked higher again this quarter. Our discussions with businesses have revealed concerns about costs such as a sharp rise in council rates and a potential rebound in shipping costs.
Today’s survey provides mixed messages for the Reserve Bank. On one hand, higher interest rates are clearly continuing to have a braking effect on activity. However, the fact that inflation is receding only slowly will remain a concern. We think the RBNZ will be looking for more reassurance from the upcoming CPI and labour market reports before they consider signalling an earlier start to OCR cuts.
