**Firms Own Trading Activity Shows Mixed Signals Amid Weak Demand**
In the September quarter, a net 14% of firms reported a decline in activity within their own businesses. Despite this, a net 9% of firms expect demand to improve in the next quarter. This highlights a significant gap between firms’ experienced demand, which remains weak, and their optimistic expectations for the future.
For the past year, actual activity has consistently fallen short of earlier forecasts of a recovery. Hiring and investment intentions have also seen a downward trend. In the September quarter, a net 23% of firms reduced staff headcount. Regarding investment, a net 13% of firms plan to cut spending on plant and machinery, while a net 20% intend to decrease investment in buildings over the coming year.
“The continued disappointing nature of the recovery in demand, combined with the volatile global backdrop, is driving heightened caution among firms,” said NZIER Deputy Chief Executive Christina Leung.
**Sector-Specific Insights**
Manufacturing remains the least optimistic sector surveyed, with only a net 3% expecting general economic conditions to improve. The building sector, although facing weak construction demand, remains cautiously optimistic. Building firms reported declines in new orders and output in the September quarter.
This softness is also evident in the architects’ workload, which indicates a flat pipeline for housing construction and a reduced pipeline for commercial and government projects over the coming year.
While confidence has dropped overall, retailers continue to display the greatest optimism despite experiencing weakness in new orders and sales. Cost pressures remain intense in the retail sector; however, the proportion of retailers able to raise prices has eased. In response to these cost pressures and weak demand, a substantial number of retailers reduced staff numbers during the September quarter.
The services sector shows a sharp contrast between firms’ expectations of an improved outlook and the weak demand they currently face. This optimism is likely supported by widespread expectations of lower interest rates over the coming year, Leung noted.
With over 40% of mortgages set for repricing within the next six months, the reduction in interest rates to date is expected to support a recovery in retail and services demand moving forward.
**Outlook on Interest Rates and Inflation**
The NZIER continues to forecast two further 25-basis-point official cash rate (OCR) cuts from the Reserve Bank of New Zealand (RBNZ) in the upcoming meetings scheduled for October and November.
“We expect annual CPI inflation to rise just above 3% over the coming quarters,” Leung said. However, ongoing excess capacity in the New Zealand economy should help drive inflation back toward the RBNZ’s target midpoint of 2% over the coming year.
Westpac Senior Economist Michael Gordon commented on the survey results, describing the economy as “still sluggish.” Regarding tomorrow’s OCR decision, he added that the survey is likely to encourage members of the RBNZ Monetary Policy Committee who felt in August that a larger circuit breaker rate cut was necessary.
“We continue to expect a 50 basis point cut to 2.50% tomorrow,” Gordon said.
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**About the Author**
Liam Dann is Business Editor-at-Large for the New Zealand Herald. He is a senior writer and columnist who also presents and produces videos and podcasts. Liam joined the Herald in 2003.
https://www.nzherald.co.nz/business/business-confidence-drops-in-key-survey-for-rbnz-ahead-of-rate-call/YNOF44WM4BBV3BLWPYI6UO7H4Y/
