The latest NZIER Quarterly Survey of Business Opinion (QSBO) showed increased business confidence in the final quarter of 2024.
A net 9 percent of firms expected an improvement in general economic conditions over the coming months on a seasonally adjusted basis. This contrasted with the net four percent of firms that had felt downbeat about the general economic outlook in the previous quarter.
Despite the continued improvement in business confidence, the measure of firms’ trading activity continued to suggest a weak demand environment. A net 26 percent of firms reported a decline in their business activity in the December quarter.
Regarding expectations of activity in the next quarter, a net 9 percent of firms expected an increase. Similar to the September quarter headline results, there was a contrast between firms experiencing weak activity and expecting activity to improve in the next quarter.
Although sentiment has improved, and there were expectations of a recovery in activity, firms remained cautious about hiring and investment. In the December quarter, 17 percent of firms reduced staff numbers.
A notable proportion of firms intend to reduce investment in buildings, plants, and machinery over the coming year. Firms will hold off on investment and hiring until they are convinced that demand will sustainably improve in their businesses.
The improvement in sentiment was across the sectors surveyed. The retail sector remained upbeat about the general economic outlook. While demand was still weak in the December quarter, a notable proportion of retailers expect a recovery in the next quarter. Some retailers could raise prices, but retail sector profitability remained weak as cost pressures intensified.
Despite the current soft demand, the services sector was also optimistic about the general economic conditions and demand outlook. The optimism in the retail and services sectors reflected the expectations that many households will likely face reduced mortgage repayments as they roll over to lower mortgage rates over the coming year.
The sentiment in the manufacturing sector also improved, but manufacturers were less optimistic than in the other sectors. Manufacturers also reported increased demand in the December quarter, especially for exports.
The lower New Zealand dollar was likely to have supported export sales. However, intensified costs and reduced pricing power continue to weigh on manufacturers' profitability.
Cost and pricing indicators indicated a continued easing in inflation pressures in the New Zealand economy. In the final quarter of 2024, the proportion of firms reporting higher costs decreased to 35 percent. Meanwhile, the proportion of firms raising prices in the December quarter remained historically low at 10 percent.
Weak demand has continued to reduce capacity pressures, which in turn weighs on inflation pressures in the New Zealand economy. This was reflected by the continued dominance of the lack of sales, which firms reported as the primary constraint on their business.
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