The September quarter Quarterly Survey of Business Opinion (QSBO) was consistent with a slowing economy, but one with a still reasonable backbone, broadly mirroring themes within the ANZ Business Outlook Survey.
Headline business confidence fell, and while falls were reasonably broad-based, sentiment was reported to be notably weaker in dairy-aligned regions (despite the QSBO not directly surveying the agriculture sector).
Activity indicators (domestic trading activity, employment and investment intentions) all held up reasonably well, and were arguably a little better than expected. This is important. Rather than how firms feel about the economy generally, it is views on their own firms’ prospects that are more important for actual growth outcomes. The overarching message from this survey is therefore not-too-bad.
But pricing measures were once again weak. Firms cut prices over the past three months and margin squeeze is certainly evident. Soggy profitability provides somewhat of a warning shot over the growth outlook, and is indicative of the risk profile facing the economy more generally.
Some indicators of capacity pressure also eased (off record levels admittedly) and staff are becoming modestly easier to find. A little more spare capacity is therefore emerging, although historical relationships with some indicators still point to a decent lift in domestic inflation from here.
This highlights ongoing tension within the inflation process and will see the debate continue over the influence of structural deflationary forces. We will be keeping a close eye on our Monthly Inflation Gauge.
While there is something for everyone (slightly better activity prospects, but ongoing weak inflation nuances), we see little in the survey to change our core views of the outlook. The current low inflation environment means the bias is for the RBNZ to deliver more – not less – monetary policy easing. And further easing remains within our central scenario. But given evidence of stabilisation in activity and the rebound in dairy prices we are not convinced this easing will be delivered at the earliest opportunity (this month’s OCR Review). The global backdrop and upcoming Q3 CPI release will be key.
Unsurprisingly, headline confidence within the QSBO fell further in the September quarter. A seasonally adjusted 9% of firms are pessimistic about the economy’s prospects over the year ahead, down from a net 7% who were optimistic in the June quarter survey.
This is the lowest level of confidence since March 2011, but is still well above the depths seen during the Global Financial Crisis.
South Island firms were reported to be the most pessimistic, although a New Zealand Institute of Economic Research (NZIER) reported that while not directly surveying the agricultural sector, weaker confidence in dairy-intensive regions such as Waikato, Taranaki and Canterbury was also evident.
But importantly, activity indicators held up reasonably well.
Firms’ experienced domestic trading activity rose from a net 10% to 12%, while expected conditions lifted to a net 17% from 13%. In fact, both are a touch above historical averages.
NZIER report that this is broadly consistent with GDP growth remaining near its current 2½% pace, which is in fact slightly above what our own Composite Confidence indicator is suggesting (closer to 2%).
This is encouraging, although perhaps reflects the fact the QSBO does not directly survey agriculture.