Businesses Very Worried
Last week we ran through a long list of reasons why growth in the NZ economy will slow this year from the above average
pace of 4.4% achieved over 2002 toward something between 2% and 2.5%. This week we have the quarterly survey from the
NZIER to strongly support the view of growth slowing, and on the face of it cause for believing the landing will be a
hard one rather than something relatively soft. But once one digs into the QSBO’s numbers the picture is less bleak than
the headline reports you’ll be reading about in the newspapers suggest, so lets do that, starting with the shock news.
In seasonally adjusted terms business confidence in the March quarter – or more accurately late March when the survey
responses were received – fell to a shocking net 56% pessimistic from 9% pessimistic in the previous quarter and 15%
optimistic in the September quarter. The latest outcome is the worst result since the December quarter of 1985 and one’s
initial reaction must be that this foretells a period of intense labour shedding, slashed capital expenditure and
borrowing, and a plummeting sharemarket as earnings forecasts are slashed.
But be warned, although the number is genuinely bad it probably substantially overstates the true sentiment of
businesses when it comes to their spending decisions. For a start there are many factors which are frankly just scaring
people at the moment and giving a downward bias to confidence readings here and almost certainly overseas as well. There
is the electricity crisis bringing worries about power costs and availability, and the long term concern beyond this
Winter of the country’s infrastructure in general and the ability of the government to competently do something to
address the infrastructure inadequacies.
There is the continuing talk of terrorism overseas and of course the war in Iraq. That appears to be over now but as the
absence of any rally in the US sharemarket shows there are lots of other things to be worried about.
Businesses are probably concerned about their ability to grow in an environment of labour shortages which appear to have
worsened in the March quarter (see below), and of course exporters will be aggressively concerned about the NZ dollar’s
record post-float 12 month rise in the past year.
But the appalling sentiment is not being translated into slashed expenditure plans. In the March quarter a net 8% of
businesses said they plan hiring more people. This was down from 10% in the December quarter but up from 5% a year ago
and well above the ten year average reading of +1%. Perhaps the still strong intentions to hire people stem from the
continuing shortage of both skilled and unskilled employees. In the March quarter a net 43% of businesses said they were
finding skilled labour hard to find. For unskilled labour the net result was 21%. Both results were worse than the
previous quarter. A gross 14% also said labour is the main constraint on their ability to expand. This has pulled back
from 16% in the December quarter but remains at high levels.
Businesses are also not reporting that they plan slashing capital expenditure. A net 7% plan boosting spending on plant
and machinery, down from 11% in the December quarter but just above the ten year average of 6%. The results are more
mixed for building investment where a net 1% plan cutting expenditure. But the ten year average reading for this measure
is –10% so the latest result is actually relatively strong!
Of key interest to the Reserve Bank is the extent to which businesses plan raising prices and the pressures on
capacity. As noted above the labour market pressures have grown worse, but utilisation of manufacturing and building
sector capacity generally eased from the 29 year high recorded in the December quarter. But the latest reading of 90.99%
remains well above average and will leave the Reserve Bank with some concerns. Expectations of raising selling prices
eased to a net 11% from 13% the previous quarter but remain above the 5% average. Cost increase expectations rose to 19%
from 16% but there could be some upward distortion from fuel price concerns which might now be easing – apart from
electricity of course, and airfares, and insurance, local authority rates, non-wage costs, wages, etc.
These inflation-type readings are not king hits for those calling for easier monetary policy and one has to doubt
whether the degree of pullback in business hiring and investment intentions is any greater than the Reserve Bank
expected in their recent Monetary Policy Statement.
The door remains open for interest rate cuts in light of the weakening world growth outlook and bad confidence readings,
but it is still a close call in our opinion. Given rate rises in Canada and low expectations of any rate cut in
Australia, the stalled appreciation of the NZ dollar, and the uncertainty about the true state of the US economy the
Reserve Bank will probably wait a while longer before making any cut if they choose to at all. Their next official cash
rate review comes on April 24 and no cut is likely then.
Overall, the NZIER’s QSBO does reveal economic weakness, but not to a great enough degree to justify a change in our
forecast of 2% - 2.5% growth this year.