Is COVID-19 the main reason for a dip in business confidence among Kiwis?

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Is COVID-19 the main reason for a dip in business confidence among Kiwis?

 Is COVID-19 the main reason for a dip in business confidence among Kiwis?
Image source: Horth Rasur, Shutterstock.com

Highlights

  • The Quarterly Survey of Business Opinion shows a decline in business confidence in NZ.
  • Demand has also fallen as the COVID-19 outbreak continues.
  • The survey shows that businesses have become cautious about investments.

With the COVID-19 outbreak lingering and the resultant lockdowns in Auckland, the business confidence of Kiwis has fallen sharply in the Q4 ended December 2021. The survey of business opinion conducted by the New Zealand Institute of Economic Research (NZIER) also showed that demand had also fallen in the same quarter.

The Survey showed that many businesses had raised prices in the December Quarter and 65% planned to do so in the current quarter. Thus, adding to inflationary pressures on the economy in 2022. The survey's measure of capacity utilisation dipped to 89.5%, from the
previous quarter's 96.1%.

Image source: © 2022 Kalkine Media New Zealand Ltd

Disruptions and uncertainty caused by the Delta variant outbreak were weighing on overall economic activity.

Also Read: Report: World’s richest got richer during pandemic
Interesting Read: Is Australia staring at stagflation in 2022?

The survey reflects ongoing weak labour market conditions and capacity constraints that the businesses are facing due to international and domestic border restrictions. According to the survey, with uncertainty over how the pandemic will evolve, businesses have become cautious about investments.

A 34% of companies expect a deterioration in general economic conditions as compared to 11% companies feeling pessimistic in the last quarter.

Labour shortages pose the biggest problem

Businesses across sectors are facing acute labour shortages. With most businesses looking to hire, there is a shortage in both skilled and unskilled labour. Companies have tried to sweeten the deal for the labour but that is leading to higher costs for businesses. 

According to the survey, 61% of businesses reported increased costs in the December quarter. However, the retail and building sectors reflected the highest increase in costs due to global supply chain disruptions due to the pandemic.

Due to high-cost pressures, more than half businesses raised prices in the quarter and others plan to increase in upcoming one. This would lead to an increase in inflation and decreased demand.
Also Read: What does 2022 look like for global housing market?

Manufacturing, services sectors more downbeat

Almost all sectors are feeling the heat, but the manufacturing sector was the most pessimistic with 34% manufactures expecting the worsening of the economy in the coming months. The pessimism was driven by slackening domestic and export demands and increasing cost pressures.

Also Read: Omicron’s spread: How severely can it impact global recovery?

The services sector was also downbeat due to the impact of increased containment measures and intense cost pressures. The building sector also reported a continued increase in costs in the December quarter.

Will interest rate hikes help business sentiment?

In 2022, the main task before the Reserve Bank of NZ (RBNZ) is to bring inflation under control. When it announces its monetary policy in February, it is expected to raise the interest rate to bring inflation under control. Actual inflation figures will be revealed when Stats NZ releases its December-quarter figures next week to see whether there has been a rise from the previous quarter’s 4.9%.

Also Read: Uncertainty around economic recovery deepens amidst the global supply chain crisis

Even though the Central Bank may raise interest rates to cool off demand, supply-side constraints still remain due to the uncertainty of the COVID-19 pandemic. Even though the Treasury was predicting a rebound in the economy after the Delta variant-related lockdowns, the new Omicron variant has added to uncertainty and pessimism.

Bottom Line: Many analysts are now predicting an economic downturn and falling prices that would force the RBNZ to halt interest rate hikes.

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