A majority of businesses expect the economy to get worse in 2023, a new survey shows. Photo: 123rf.com
The Institute of Economic Research's latest survey shows business sentiment has continued to deteriorate to the weakest level in the survey's history.
The latest NZIER Quarterly Survey of Business Opinion (QSBO) conducted between 28 November and 9 January showed a seasonally adjusted net 73 percent of businesses expected general economic conditions to deteriorate over the coming months.
The latest quarter survey captured the effects of the Reserve Bank's hawkish November Monetary Policy Statement (MPS) on 24 November, which indicated it would take interest rates higher than initially expected to rein in inflation, alongside a recession from the middle of this year.
When it came to activity in their own business, a net 13 percent of firms reported a decline in activity over the past quarter, which was the weakest level since the June 2020 survey, when the full impact of the first Covid-19 lockdown was captured.
Businesses were much more cautious and looking to reduce staff numbers and pare back on investment plans.
Despite a greater proportion of businesses passing on higher costs by increasing their prices, profitability had weakened.
The pick-up in costs and prices pointed to high inflation persisting into 2023.
Shortages of skilled and unskilled staff remained acute despite the decline in hiring, while finding labour remained the top constraint for businesses.
A growing proportion of firms were also starting to report sales as the primary constraint for their business, suggesting weakening demand was beginning to impact more businesses.
The mood was downbeat across the sectors.
The building sector was the most pessimistic of the sectors surveyed, with a net 77 percent of firms expecting worsening economic conditions over the coming months.
The decline in the building sector's new orders and output points to a softening in demand over the longer term.
While most building sector firms still reported intense cost pressures, the proportion of firms that increased prices continued to fall in the December quarter.
ANZ Bank senior economist Miles Workman said the latest survey indicated the supply-demand imbalance in the labour market may have finally peaked, but the Reserve Bank still had work to do to tame inflation.
Westpac senior economist Satish Ranchhod said rising costs and prices meant the central bank would need to raise the official cash rate (OCR) next month - probably by another 75 basis points to 5 percent.
"What we are starting to see is the economy is losing some steam as interest rates have pushed higher, but that's after some strong activity in recent years," Ranchhod said.
"The economy is still running pretty hot, and the economy is still dealing with some strong inflation pressures."
The Reserve Bank raised the OCR by 75 basis points in November to 4.25 percent and was forecasting further rises to a peak of 5.5 percent later this year.
The National Party's Finance Spokesperson Nicola Willis said the survey showed the weakest result on record for business confidence, and the government needed to come back from holiday with a "real economic plan".
"The government's failure to rein in spending and address labour shortages mean Kiwis are being slammed by rapidly rising interest rates. It's no surprise that the cost of that failure has left businesses feeling gloomy," she said in a statement.
"National would rein in wasteful spending that's adding fuel to the inflation fire, stop adding new costs and taxes, refocus the Reserve Bank on price stability, address worker shortages and let Kiwis keep more of what they earn."
However, Minister of Finance Grant Robertson said the findings were not unexpected, and mirrored what had been reported in similar surveys and commentary towards the end of 2022.
"I've been saying for some time that 2023 is going to be a difficult year for New Zealand. The IMF is forecasting countries will either be in recession or feel like they are, and New Zealand is not immune to what happens overseas," he said.
"Unemployment is near record lows, public debt is relatively low compared to our counterparts, exports are growing, tourists are returning and overseas workers are filling vacancies to help rebuild the economy. The government is doing its bit to help ease inflation pressures, while responsibly managing the books to ensure we can support households and businesses as necessary."