Home » The New Zealand economy is at risk of a significant downturn due to declining business confidence.

The New Zealand economy is at risk of a significant downturn due to declining business confidence.

by FX BrokerNews

Bloomberg News has reported that New Zealand’s economic outlook is growing more grim, with the possibility of a hard landing looming large as business confidence takes a substantial blow in the first quarter.

According to the NZ Institute of Economic Research (NZIER), there’s been a significant shift in sentiment, with a net 25 percent of firms expressing pessimism about the economic outlook for the next six months, sharply up from 2 percent in the previous quarter.

Furthermore, a net 23 percent of businesses reported a decline in their own trading conditions in the first quarter, marking the weakest reading since the height of the Covid-19 pandemic in mid-2020.

Bloomberg’s report quoted NZIER’s Principal Economist, Christina Leung, who highlighted the growing concern over New Zealand’s economic trajectory. Leung stated, “The key question is whether we are headed for a soft or a hard landing. Previously our forecast was a soft landing for the New Zealand economy. With this release, it suggests increased risk of a hard landing.”

Anticipating the Reserve Bank of New Zealand’s upcoming decision, most economists expect the Official Cash Rate to remain at 5.5 percent, with monetary easing possibly beginning in late 2024. However, NZIER forecasts suggest policymakers may keep rates steady until May of next year.

The central bank’s strategy of high-interest rates to combat inflation is starting to impact company profits and employment, exacerbating the economic slowdown. With New Zealand’s economy contracting in four out of the past five quarters, concerns about further deceleration in 2024 have heightened.

Leung highlighted the possibility of the Reserve Bank cutting the Official Cash Rate sooner than expected in response to a hard landing or weaker economic activity, particularly if inflation slows down faster.

Today’s NZIER report offered little optimism, revealing that a net 11 percent of firms laid off workers in the first quarter, with only 2 percent planning to hire in the next three months. Additionally, a net 33 percent anticipate a decline in profits in the second quarter, while investment intentions are dwindling.

Despite the gloomy outlook, Leung noted a positive aspect regarding inflation, as fewer companies plan to raise prices despite escalating costs.

The brief surge in business sentiment following the election of a centre-right government, committed to reducing economic regulations and taxes, has faded. Post-election optimism has given way to the reality of a sluggish economy.

Miles Workman, senior economist at ANZ Bank New Zealand, summarized the prevailing sentiment, stating, “The post-election honeymoon is now over and the reality of a weak economy is back in the driver’s seat. The overall vibe is a deterioration from last quarter on the activity front, with a little progress on the inflation side.”

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