Business Confidence May Have Improved, But They Don’t Like Uncertainty. And Trump Revels In Uncertainty

• The improvement in business confidence continues. Expectations of a turnaround in demand underpins the improved sentiment. However, experienced trading activity remains weak. The here and now demands further rate relief. Especially as uncertainty over the global backdrop grows.
• Cost pressures intensified, following a marked depreciation in the NZ dollar. However, pricing metrics remain at historically low levels. Weak demand continues to limit firms’ pricing power.
• The violent volatility in markets happened after this survey was taken. What will firms make of the Trump tariff turmoil? Too much? Too soon? Too bad... which ain't good. Uncertainty kills growth.

The results of NZIER’s latest Quarterly Survey of Business Opinion was some much needed good news in a sea of worry. Business confidence improved in the March quarter – despite weak domestic demand and the tumultuous global backdrop. Over the quarter, a net 23% (seasonally adjusted) of firms expect economic conditions to improve in the coming months – an encouraging lift from the net 9% late last year. The results are somewhat surprising given that domestic greenshoots are few and far between, and that the global growth outlook is clouded by potentially destructive developments in US trade policy. It must be noted that survey responses were collected from Feb 27 to Mar 31. Tariffs have been threatened by US President Trump since elected. However, the reciprocal tariffs made on Liberation Day – just a few days after the survey close – were far worse than feared. If the survey was taken today, we suspect the responses would look a shade less rosy.

Nonetheless, business confidence has lifted to the highest since September 2016. But there continues to be a dichotomy between how businesses are feeling and what they are experiencing. Current activity levels remain weak, reflecting still-subdued domestic demand. According to Kiwi businesses, it is still a challenge to navigate the current economic environment. Over the March quarter, a net 21% of firms reported a decline in trading activity, similar to the previous quarter. However businesses are still optimistic for a turnaround in activity. A growing share of firms (from net 9% to net 12% in Q1) see own trading activity increasing in the coming months.

Firms are still feeling cautious when it comes to hiring and investing. A net 17% of firms cut headcount over the quarter, while a net 2% intend to reduce investment in plant and machinery. While appetite among business to grow is not there yet, it is building. Investment intentions are the strongest they’ve been for a long time, but coming off very weak bases.

Continued weakness in activity levels points to a period of below-trend growth. A disruption to global trade would also weigh on Kiwi activity going forward. We continue to expect a 25bps cut from the RBNZ tomorrow as well as in May. And as downside risks to growth mount, the case strengthens for a cash rate below 3%.

© Scoop Media