New Zealand businesses remained downbeat in the first quarter as high interest rates and slowing demand push the nation toward recession.
(Bloomberg) — New Zealand businesses remained downbeat in the first quarter as high interest rates and slowing demand push the nation toward recession.
A net 66% of businesses expect the economy to deteriorate in the next 12 months, the New Zealand Institute of Economic Research said Tuesday in its quarterly survey of business opinion. That’s little changed from 70% in the fourth quarter of 2022, which was the lowest since the early 1970s.
Economic growth is slowing after the Reserve Bank’s aggressive monetary policy tightening, which is aimed at curbing demand in order to reduce inflation. The central bank is tipped to raise the Official Cash Rate by a further 25 basis points to 5% Wednesday, but economists say borrowing costs may be nearing a peak.
“There are signs the dampening in demand the Reserve Bank has been trying to engineer is starting to gain traction,” NZIER Principal Economist Christina Leung told a briefing. “There are encouraging signs for the RBNZ. The key question is whether it believes it has done enough.”
Leung expects the central bank will raise the OCR tomorrow but then take a wait-and-see approach to assess the impact of what will be 475 points of tightening since late 2021.
NZIER provisionally expects the economy to have shrunk slightly in the first quarter, putting the nation in a recession after a 0.6% drop in gross domestic product in the three months through December.
‘Pretty Pessimistic’
“It is still a subdued picture for the New Zealand economy,” Leung said. “The mood is pretty pessimistic.”
A net 10% of firms said their own trading activity slowed in the quarter, and 8% expect a deterioration in the three months through June.
Firms are reporting that sales are the primary constraint on their business, which adds to signs that demand is weakening. Previously, access to labor was the biggest challenge.
The opening of New Zealand’s borders is starting to alleviate labor shortages and ease capacity pressures, Leung said. A net 44% of firms said it was hard to find skilled labor, down from 68%.
There are signs of easing cost pressures, with 63% experiencing increases in the first quarter compared with 81% in the preceding three months.
Operating margins remain squeezed, with 52% of firms reporting a drop in profitability. Still, firms are less pessimistic about their investment and hiring plans because they have more clarity about the outlook for borrowing costs.
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