A survey out yesterday suggests the dairy sector's woes are weighing on business confidence more widely than previously thought.
The New Zealand Institute of Economic Research (NZIER) released its widely-respected Quarterly Survey of Business Opinion which showed confidence fell from a net 13% to -1% in seasonally adjusted terms in the three months ended March.
While the survey does not cover the agriculture sector directly, there was a noticeable hit to confidence across the manufacturing, construction, retail and service sectors.
Firms' reported activity over the past three months was steady at 18% but expectations for the next three months fell from 20% to 6%, the lowest reading since March 2011.
Yesterday's survey showed of the 845 respondents, a net 26% experienced an increase in costs while 5% cut prices in the quarter, 24% anticipated those costs to keep rising and 11% planned to lift their prices.
NZIER senior economist Christina Leung said the inability to pass on higher costs had hurt profitability and firms were increasingly looking for ways to raise prices to lift earnings.
‘‘Businesses are finding it very difficult to raise prices but there is some optimism and intentions prices will increase in the next quarter. Businesses have tended to be fairly optimistic about improvements in profitability.''
Their expectations had been dashed and it was one development worth keeping an eye on, she said.
Westpac senior economist Michael Gordon said the readings were broadly in line with Westpac's forecast of a 0.5% rise in GDP in the March quarter after two consecutive quarters of 0.9% growth.
The survey suggested inflation pressures remained muted. A greater number of firms reported a rise in costs over the past three months, perhaps a delayed impact from the fall in the New Zealand dollar last year.
However, there was no real sign firms had been able to pass on those cost increases - aside from the construction sector where capacity constraints had been evident for some time, he said.
ASB senior economist Jane Turner found the most concerning aspect of the survey was the ‘‘reasonable fall'' in own activity expectations to the lowest level since early 2011 when the economy went through a technical recession.
‘‘In saying that, experienced activity for the March quarter remained healthy and consistent with above trend growth. This suggests while the economy has maintained momentum for now, it is at risk of a crisis of confidence.''
The final detail of the survey was mixed, she said. Employment and investment intentions moderated but for now, levels remained acceptable. A further slow-down in those areas would raise the risk of a downturn becoming a self-fulfilling prophecy.
Forward-looking intentions for activity of architects increased, particularly around housing, suggesting the construction sector growth was set to benefit from a second wind in 2016-17.
Capacity measures specific to the construction sector tightened, as it became more difficult to find skilled labour.
However, broader labour market indicators remained flat, with a smaller increase in the difficulty of finding unskilled labour.
It was the latter which was more relevant to the Reserve Bank, Ms Turner said.
‘‘A degree of slack in the New Zealand labour market is keeping wage inflation, and broader inflation pressures, subdued.''
Pricing intentions slipped slightly and net 5% of firms cut prices in the first quarter. The cuts were not planned as one quarter ago, a net 11% planned to increase prices.
The Reserve Bank unexpectedly cut rates in March and Ms Turner expected two further cuts in the coming year. The first opportunity for the bank to cut its official cash rate was on April 28.
The Reserve Bank of Australia held its official lending rate at 2% yesterday.
The outlook for lower interest rates should provide a buffer against increased global anxiety and a recovery was expected in New Zealand confidence in coming months.
The good performance of the export sector, beyond dairy, and strengthening housing activity suggested the economy was responding to past monetary stimulus.
Migration flows would also remain supportive of growth, she said.
At a glance
Business confidence turns pessimistic.
Businesses struggling to increase their prices.
Hiring intentions scaled back.
Manufacturers, in particular, were gloomy.
