- Business confidence lifted modestly in the March quarter according to the latest quarterly survey from NZIER. Fewer firms expect economic conditions to deteriorate over the coming months.
- Cost pressures have built up for firms and are likely to continue to do so in the months ahead. But disruption is expected to be temporary.
- Looking through the near-term softness of the data, the NZ economy looks to be on a recovery trajectory from here. Firms’ continue to hire and invest, and the pipeline of building work in the construction sector is plentiful.
Business confidence lifted modestly in the March quarter according to the latest quarterly survey from NZIER. However, the improvement was not by enough to convince us that the economy will avoid a technical recession. The reality of a closed border started to bite as the summer wore on, with retailers, tourist and education operators struggling. A net 11% of firms noted a deterioration in general business conditions (down from a net 16%). Domestic trading activity (DTA), both experienced and expected, held steady at the start of the year. A net 8% of firms expect trading activity to improve in the next quarter.
As expected, a clear theme of today’s survey was current cost increases, supply-chain issues and an erosion of profitability faced by firms. Something has to give. An acceleration in inflation lies ahead. But we think a rise in inflation will prove temporary as supply-chain issues are addressed. Headline inflation may rise, but core inflation will remain subdued. Because the tectonic forces pushing prices down, including demographics and technology, are at play. Both the building sector and manufacturers noted concerns around supply and capacity constraints.
Looking through the near-term softness of the data, the NZ economy looks to be on a recovery trajectory from here. Firms continue to hire and invest, and despite the supply constraints the pipeline of building work in the construction sector is plentiful. A net 15% of firms are looking to invest in plant and machinery, the highest reading in three years. Similarly, employment intentions jumped in the QSBO to the highest level in over four years.
Cost-push inflation
As seen in other surveys of business confidence, cost pressures have built up for firms and are likely to continue to do so in the months ahead. A net 42% of firms expect costs to increase in the second quarter. That’s the highest share seen since 2008. Firms’ costs have lifted at the start of the year following rising oil prices, ongoing supply-chain disruption and snarl-ups at our major ports. In the near-term, inflation is set to take off, in part due to the pass-through of rising costs (including a minimum wage hike to $20/hr), but also due to the base effects of a weak quarter of inflation last year. Retailers in particular have experienced elevated costs for a few quarters now and seem to now be passing these onto customers. The key question for the RBNZ is whether the upcoming rise in inflation will be transitory or more sustained.
Like us, the RBNZ is unlikely to get anxious about the upcoming acceleration in inflation which should prove temporary. Supply-chains issues should eventually be addressed, particularly as covid vaccines are rolled out and economies around the world reopen. The Bank should look through the rise. We see annual CPI inflation spiking above the 2% target mid-point at around 2.5%yoy in the June quarter. Supporting this view are inflation expectations. Inflation expectations have also rebounded since last year’s lockdown but remain well anchored to the Bank’s 2% target mid-point.
Intentions intensify
Although the economic outlook ahead remains uncertain, firms’ hiring and investment intentions have strengthened. The demand for labour picked up over the March quarter. More firms increased their number of staff, and a net 18% (up from net 15%) of firms plan to hire in the next quarter. More firms are also planning to increase investment over the coming year A net 15% of firms are looking to invest in plant and machinery, the highest reading in three years.
Although employment demand is strengthening, firms are finding it difficult to source the supply, particularly for skilled labour. A shortage of labour should support wage growth over the coming year. The March quarter survey also suggests that firms may be directing investment toward labour-saving technology given higher labour costs and the closed border shrinking the pool of workers from which to choose.