Businesses turn pessimistic in March quarter as margin squeeze bites

New Zealand businesses turned pessimistic about the state of the economy in the first three months of the year, as their inability to pass on rising costs squeezed margins.

A net 1% of firms surveyed in the New Zealand Institute of Economic Research's quarterly survey of business opinion expect general business conditions to deteriorate, turning from an optimistic net 13% reading three months earlier. A net 18% of firms experienced better trading activity, unchanged from December, while just 6% anticipate a pickup in trading compared to 20% three months earlier.

"A key driver of this gloominess is that firms have consistently had their expectations of a pick-up in sales dashed in reality," NZIER senior economist Christina Leung said in a statement. "Their optimism is starting to wane – firms now see weak demand ahead."

The survey follows ANZ Bank New Zealand's business confidence survey last week showing just 3% of firms were optimistic about the economy, with a growing divide between an upbeat North Island and an increasingly gloomy South Island.

Ms Leung told a briefing in Wellington that the survey's pessimism suggested an increased risk the Reserve Bank will cut the official cash rate to 2% in April, rather than wait until June.

The New Zealand dollar slipped to 67.99USc, from 68.25USc immediately before the 10am release of the survey.

Today's survey showed of the 845 respondents a net 26% experienced an increase in costs while 5% cut prices in the quarter and 24% anticipate those costs to keep rising while 11% plan to hike their prices.

Ms Leung said this inability to pass on higher costs had weighed on firms profitability and firms were increasingly looking to raise prices to lift earnings.

"Businesses are finding it very difficult to raise prices, however there is some optimism and intention that prices will increase in the next quarter," Ms Leung said. "Businesses have tended to be fairly optimistic about improvements in profitability, which is why they've had their expectations dashed, and is one development that's worth keeping an eye on."

The survey showed a net 4% of businesses experienced a decline in profit in the March quarter, unchanged from the prior period, and 17% project increased earnings ahead, up from 4% in December.

Firms scaled back their hiring intentions with a net 9% looking to hire, down from 14% in December, while 11% took on more staff, down from 17% in the prior period. A net 33% said it was hard to find skilled labour, and a net 11% said unskilled labour was difficult to attract.

Capacity utilisation was unchanged at 93.2%, while a net 15.8% saw capacity as a constraint, down from 17.4%.

Investment intentions were largely unchanged, with a net 2% looking to buy new buildings, up from 1% in December, and 11% intending to invest in plant and machinery, compared to 10% in December.

Manufacturers were particularly gloomy with a net 6% expanding output in the quarter, compared to 26% in December, and a net 1% experiencing a contraction in New Zealand deliveries, down from a net 17% expansion. A net 5% of manufacturers experienced a rise in exports, down from 17%.

(BusinessDesk)