(Bloomberg) — New Zealand businesses are more pessimistic on the economy, increasing the risk of another contraction and putting pressure on the central bank to cut interest rates sooner than it’s currently projecting.
A net 44% of firms are pessimistic about the outlook for the economy over the next six months, up from 25% in the first quarter, the New Zealand Institute of Economic Research said Tuesday in Wellington. Its Quarterly Survey of Business Opinion showed a net 28% said their own trading deteriorated in the three months through March — the weakest reading since mid-2020 during the Covid-19 pandemic.
New Zealand’s central bank has kept interest rates high to slow demand and curb inflation, and this is resulting in squeezed company profits and job cuts, the report shows. The risk is that the economy — which has contracted in four of the past six quarters — slows even further in 2024.
“These results suggest the potential for a contraction in the economy over the coming year,” said NZIER Principal Economist Christina Leung. The contraction could occur in the second quarter or subsequently, depending on developments elsewhere in the economy, she said.
NZIER currently expects the Reserve Bank to begin cutting the Official Cash Rate in May next year, “but today’s results represent a risk of an earlier start to the easing cycle,” she said.
Evidence of declining inflation pressure “is encouraging for the RBNZ,” said Mark Smith, senior economist at ASB Bank in Auckland. “Our OCR call is under review. Cuts could come as soon as November, but the RBNZ is likely to err on the side of caution and could delay cuts to 2025.”
The RBNZ has previously signaled it sees no scope for cuts until the second half of 2025. Investors are pricing a cut late this year while most local economists are tipping a monetary easing will begin in early 2025.
Today’s report contained little positive news.
A net 25% of firms fired workers in the second quarter — the most since the economy was emerging from the global financial crisis in 2009 — and a net 10% expect to reduce staff numbers in the three months through September. A net 34% expect their profits to be weaker in the third quarter and investment intentions are falling.
A net 23% of firms expect to increase prices in the third quarter — the lowest since 2021 — while companies are increasingly finding it easier to find workers, adding to signs of reduced pressure on wages. Fewer companies reported rising costs.
“The continued decline in cost and pricing indicators points to a further easing in pricing pressures,” said Leung. “Higher interest rates continue to have their intended impact on weakening demand in order to reduce inflation.”
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