Balancing act

Falling business confidence supports our view that economic growth will be softer again over the second half of this year, prompting another interest rate cut by the Reserve Bank in November. But with a substantial amount of stimulus already in place, there are competing arguments for and against any more easing beyond this.

The latest Quarterly Survey of Business Opinion found that a net 11% of businesses saw a downturn in trading activity in the September quarter, compared to a net 4% in the previous quarter. This was the weakest reading since 2010, and provided further evidence of a slowing in the New Zealand economy. Firms were slightly more positive about their prospects for the next three months, but this measure remains at a relatively low level.

This survey followed the RBNZ's surprisingly large 50 basis point OCR cut back in August, which was aimed at shoring up the economy in the face of global headwinds and softening demand. Since that time, we've seen falls in borrowing rates and a decline in the NZ dollar. But despite this, businesses are still down in the mouth.

Looking into the details of the report, it's not hard to see why. Businesses are highlighting both softness in demand and a squeeze on their margins due to rising costs. Against this backdrop, it's no surprise that firms are scaling back their expansion plans. The September survey saw a further easing in the number of businesses planning to take on more staff. And there was a steep drop in investment intentions – firms are just not buying the line that super-low interest rates mean it's a great time to invest.

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