Business confidence declines in September quarter
The latest NZIER Quarterly Survey of Business Opinion (QSBO) revealed a fall in business confidence in the September quarter. On a seasonally adjusted basis, a net 15 percent of firms expect the general economic outlook to improve in the coming months. While sentiment remains in positive territory, this is a notable decline from the net 26 percent expecting improvement in the June quarter.
When it comes to firms’ own performance, a net 14 percent reported a drop in trading activity in the September quarter. Despite this, nine percent of businesses expect demand to pick up in the next quarter. This disconnect between current conditions and future expectations has persisted throughout the past year, with actual trading results consistently underperforming earlier recovery forecasts.
Hiring and investment intentions have also weakened. A net 23 percent of businesses reduced staff numbers during the September quarter. Looking ahead, a net 13 percent of firms plan to cut back on investment in plant and machinery, while 20 percent anticipate reducing investment in buildings over the coming year. The slow recovery in demand, along with a challenging global environment, continues to weigh on business sentiment and decisions.
Demand remains the dominant concern, with a net 63 percent of firms identifying a lack of sales as their primary constraint. In contrast, only three percent pointed to labour shortages as a key issue. Firms report that it’s become easier to find workers, especially for unskilled roles — indicating ongoing excess capacity in the labour market.
The manufacturing sector feels the least optimistic
Among all sectors surveyed, manufacturers were the least confident, with only a net three percent expecting improvements in the broader economy. While domestic orders saw some uplift, export demand remained in contraction, reflecting ongoing global uncertainty. Profit margins in manufacturing deteriorated during the quarter, even though many firms increased prices to offset rising costs. The sector continues to face strong headwinds from sluggish global growth and weaker investment abroad, which directly affects manufacturing demand in New Zealand.
The building sector remains cautiously optimistic
The construction sector held onto some optimism, although underlying demand remains soft. Firms in the building industry reported declines in both new orders and output over the September quarter. These trends align with the NZIER’s measure of architects’ work in their own offices, which points to a flat housing construction pipeline and falling commercial and public sector project volumes in the year ahead. Other data, including building consent figures from Stats NZ, support this outlook, suggesting an uneven and fragile recovery in construction activity.
Retail remains the most optimistic sector
Despite the broader decline in sentiment, the retail sector was the most optimistic of all sectors in the September quarter. This comes even as retailers continue to report weak demand and a drop in new orders and sales. Cost pressures remain elevated, but fewer retailers reported raising prices compared to previous quarters. In response to squeezed margins and subdued sales, many retailers cut staff numbers during the quarter. The sector’s relative optimism appears to be underpinned by expectations that consumer demand will improve as interest rates decline.
Services sector mirrors retail in expectation vs reality
Like retailers, services sector firms are showing a disconnect between weak current demand and more hopeful expectations for the near future. This optimism may stem from broad market expectations of falling interest rates in the coming year. With more than 40 percent of New Zealand mortgages set to reprice in the next six months, many firms anticipate that reduced borrowing costs will eventually support a rebound in both retail and services demand as consumer spending picks up.
Inflation pressures picked up in the September quarter
Pricing and cost indicators point to a modest uptick in inflation pressures in the September quarter. A net 11 percent of firms increased their prices, reversing the trend from the June quarter, when a net 1 percent had lowered prices. However, price-setting ability remains uneven across sectors. In the building industry, pricing power softened significantly, with 20 percent of firms reporting they had to cut prices.
Looking ahead, NZIER expects annual CPI inflation to edge just above three percent in the near term. However, with excess capacity still evident across the economy, inflation is projected to trend back toward the Reserve Bank’s two percent target midpoint over the coming year. As a result, NZIER continues to forecast two additional 25-basis-point Official Cash Rate (OCR) cuts from the RBNZ, one in October and one in November.
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