Market Trends

New Zealand's Economic Future Uncertain as Business Confidence Plummets

(New Zealand) – The New Zealand Institute of Economic Research has raised concerns of a potential 'hard landing' for the nation's economy as business sentiment drops sharply. According to the institute's Quarterly Survey of Business Opinion, there has been a significant rise in economic pessimism among businesses, signaling challenging times ahead.

A Stark Drop in Business Morale

The first quarter of the year saw a pronounced downturn in business confidence, with a net 25% of firms expressing a negative outlook for New Zealand's economy in the next six months. This marked a substantial increase from the mere 2% reported in the final quarter of the previous year. A further net 23% of businesses reported a deterioration in their own trading conditions during the three months leading up to March. This level of pessimism has not been observed since the height of the Covid-19 pandemic in mid-2020.

Amidst these troubling developments, the Reserve Bank of New Zealand has been leveraging high-interest rates as a tool to temper demand and rein in inflation. As a consequence, businesses are feeling the squeeze, as highlighted by decreasing profits and an uptick in job reductions. With the economy having shrunk in four of the past five quarters, there is a mounting risk that the economic downturn could persist into 2024.

The Hard vs. Soft Landing Debate

"The key question is whether we are headed for a soft or a hard landing," stated Christina Leung, Principal Economist at the NZ Institute of Economic Research, during a press briefing. While previous forecasts leaned towards a gentle easing of economic activity, recent indicators point towards the increased danger of a steeper decline or 'hard landing.'

The nation's central bank is expected to maintain the Official Cash Rate (OCR) at a steep 5.5% in its upcoming announcement, following indications that rate cuts may not be on the horizon until 2025 at the earliest. Contrary to this stance, most economists speculate that monetary easing could commence towards the end of 2024. Nevertheless, the NZIER projects that policymakers will hold steady until May of the following year.

Leung noted, "If we are in for a hard landing or weaker activity, then naturally if it flows through into a faster slowdown in inflation, then you would expect that that will allow the Reserve Bank to cut the OCR sooner."

Little Optimism in Current Forecasts

The latest report from the institute offers scant optimism. A net 11% of companies reported workforce reductions in the first quarter, and a mere 2% plan to expand their hiring in the following three months. Looking ahead to the second quarter, a net 33% of firms predict a drop in profitability, and investment intentions are on a downward trajectory.

One small silver lining for the inflationary outlook is that fewer companies are planning to increase their prices even as they grapple with surging costs. This dynamic can potentially contribute to a more tempered inflation rate, a view shared by Leung.

The Ephemeral Post-Election Boost

Business confidence had seen a brief uptick in the fourth quarter following the election of a center-right government, which pledged to streamline the economy by cutting back on regulatory red tape and reducing taxes. This surge in optimism appears to have been short-lived.

"The post-election honeymoon is now over, and the reality of a weak economy is back in the driver's seat," expressed Miles Workman, a senior economist at ANZ Bank New Zealand. The prevailing sentiment suggests a downturn from the last quarter's performance, accompanied by a marginal improvement in the inflation landscape.

©2024 Bloomberg L.P.

Conclusion

New Zealand's economy stands at a precarious juncture. The nosedive in business confidence underscores the anxiety coursing through the commercial sector. As the Reserve Bank grapples with the delicate balance between containing inflation and fostering conditions for economic growth, the country looks on with bated breath, hoping that the eventual landing - be it hard or soft - does not undo the hard-earned progress made since the pandemic era.

Final thoughts focus on the upcoming decisions of the Reserve Bank, which could have lasting impacts on the trajectory of the nation's fiscal future. As economists debate the timing and scale of potential monetary policy shifts, businesses and financial markets will have to navigate through a landscape of uncertainty. How New Zealand's economy will fare in the turbulent times ahead is a question that only time will tell.

(This news article is based on the findings and information expressed in the Quarterly Survey of Business Opinion by the NZ Institute of Economic Research: https://www.nzier.org.nz)