New Zealand businesses confidence up, but still low in September

After falling for the past five months, business confidence picked up in September. Given the extent of the recent falls in confidence, as well the recent recovery in dairy prices, some recovery in confidence is unsurprising. But it's important to put September's pick-up in context. Businesses remain very concerned about the economic outlook over the coming year. Confidence in the overall outlook for the economy is lingering around levels last seen during the midst of the financial crisis. In addition, businesses' expectations for activity in their own firms remain around multi-year lows. It's a combination of conditions that reinforces the expectations that we'll see a marked slowdown in growth over the coming year, with growth falling from rates of over 3% to rates around 2%.

GDP growth of 2% isn't dire. But the difference between an economy growing at 3% and one that's growing at 2% will be very noticeable, especially in the labour market. Businesses' hiring intentions have plunged in recent months and they remained low in September, signalling a drop-off in employment growth over the coming year.

There was one part of the survey where a notable lift is seen - pricing intentions. The number of businesses planning on increasing their prices rebounded in September, back to slightly above average levels. This likely reflects that the recent fall in the NZD is pushing up the prices for a range of imported goods, including consumer items and productive inputs. But while a near-term lift in import prices seems likely, the real question is how sustained this pick up will be. The RBNZ is expecting a long-lasting increase in imported inflation over the next few years. 

"In the face of softening demand, we think the RBNZ will still face a tough task in getting inflation back to 2% on a sustained basis", notes Westpac Research.