9 Apr 2024

Slowdown in sales, high interest rates hit business confidence

10:55 am on 9 April 2024
Close up of hand using tablet with financial digits and downward red arrow on blurry background, illustrating economic decline.

The NZIER's March quarter business survey shows a net 24 percent of respondents think economic conditions will get worse in the coming year. Photo: 123rf

Business sentiment has soured in the first three months of the year as firms struggle with lower sales and high interest rates, leading them to shed staff and hold back on investment.

The Institute of Economic Research's March quarter business survey shows a net 24 percent of respondents think economic conditions will get worse in the coming year.

That compares with a net 10 percent in the December survey.

Firms reported a decline in their own trading and were markedly more negative and cautious about the prospects for their profits and investments.

A net 23 percent of firms reported a fall their trading in the past quarter from a 7 percent rise in the previous survey.

"Business confidence has deteriorated, with the building sector feeling particularly pessimistic in the face of weak demand," the NZIER said.

Firms expected the weakness would continue with a net 11 percent forecasting a drop in their own business in the coming quarter from 7 percent optimism.

NZIER principal economist Christina Leung said the survey was sobering.

"The post election rebound in confidence was short-lived."

She said slowing sales and high interest rates were having a marked impact on sentiment and activity, with added caution driven by uncertainty over government spending cuts and reductions in the public sector.

"Sales are now the primary constraint on business ... which reflects that higher rates are flowing through the broader economy."

The survey showed 49 percent of respondents faced increased costs and 53 percent expected future price rises, little changed from the previous quarter.

The number raising their prices was 35 percent, with the number expecting to raise prices easing to 37 percent.

"Inflation indicators point to a continued easing in inflation pressures," Leung said.

Labour shortages were no longer an issue or a major problem for firms, and the weakness in sales and profits now meant jobs were being shed.

The construction sector was the most pessimistic as falling demand dented the ability to raise prices.

Leung said the key issue was whether the economy would have a hard or soft landing.

"We are still forecasting a soft landing, but this survey suggests the risks of a hard landing are increasing."

She expected the Reserve Bank to hold the official cash rate at its current 5.5 percent until May next year, but said a more severe economic downturn could bring that forward.