New Zealand business confidence hits net 40% in Q3 despite oil headwinds

Many businesses anticipate higher interest rates in the next twelve months, and evidence that slack in the economy is diminishing backs that expectation. However, moderating cost and price indicators provide the Reserve Bank of New Zealand some flexibility regarding inflation. The key variable is oil: the renewed US-Iran tensions have once again pushed up fuel costs, and additional increases would challenge NZIER's assessment that the energy spike has not yet led to wider inflationary pressures. For the New Zealand dollar, the survey provides limited support via stronger growth and interest rate outlooks, although the disconnect between sentiment and real economic activity reduces its significance.

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New Zealand companies have seldom been this optimistic about an economy that has yet to show improvement in their own incoming orders, with oil acting as a wild card that could narrow the discrepancy in an unfavorable direction.

Summary:

• A net 40% of businesses anticipate improved overall economic conditions, compared with a net 14% in the previous quarter.
• Own domestic trade was unchanged or marginally weaker, with a net 1% of firms recording a drop.
• Optimism increased across all sectors, with retail leading at a net 57% and construction at a net 46%.
• Capital expenditure plans have strengthened, and a significant number of companies intend to recruit, even though a net 5% reduced headcount during the quarter.
• The proportion of firms seeing higher costs declined to a net 47% from a net 54%, and price increases became less common.
• According to NZIER, elevated oil prices stemming from the US-Iran conflict persist as a challenge, and most businesses expect interest rates to climb.

Business confidence in New Zealand rose steeply in the three months to September, based on the most recent NZIER Quarterly Survey of Business Opinion, though companies' own operational activity has not kept pace with their more optimistic economic outlook.

On a seasonally adjusted basis, a net 40% of businesses forecast better general economic conditions in the months ahead, a rise from a net 14% in the June quarter. Real activity was unchanged to moderately lower, with a net 1% of firms indicating a fall in their domestic trade during the period.

The improvement in sentiment occurred notwithstanding renewed US-Iran hostilities, which have driven up international oil prices once more. NZIER stated that the impact on confidence from Middle Eastern events seems limited at present, but geopolitical and oil supply uncertainties continue to represent a challenge for New Zealand's economic recovery over the next year.

Every sector surveyed saw an increase in confidence. Retailers were the most optimistic, at a net 57% anticipating better conditions, despite declines in new orders and sales during the quarter and deteriorating profitability because weak demand prevented them from transferring higher costs. The construction sector moved from negative sentiment earlier this year to a net 46% expecting improvement, supported by rising new orders and production, although architects' workloads suggest a stagnant housing pipeline and declining commercial and public sector work. Manufacturers cited stronger demand from both domestic and export markets, and the services sector remained positive about the outlook despite lower volumes.

Capital expenditure plans have increased, with businesses intending to invest in structures, equipment and machinery after being cautious earlier in the year. A net 5% of companies reduced their workforce during the quarter, but a substantial proportion intends to hire in the coming three months. Insufficient demand was still the primary limitation, but companies experienced greater difficulty in hiring skilled personnel, which NZIER noted indicates that spare capacity is beginning to diminish.

Measures of costs and pricing have moderated from high levels. The proportion of businesses reporting increased costs dropped to a net 47% from a net 54%, cost outlooks softened, and fewer companies increased their prices. According to NZIER, this lowers the risk that higher fuel costs will spill over into general inflation. A broad expectation among firms is that interest rates will rise over the next year, and NZIER anticipates that higher mortgage payments will limit household discretionary expenditure as loans are repriced.