Why business confidence is bouncing back

Business confidence in New Zealand has improved over the past few months, but rising costs are a burden, an economist says. 

The economy slowed during 2017 and in the first half of 2018, and some of the key factors were a slowdown in the housing market and poor agricultural conditions, Westpac chief economist Dominick Stephens said. 

But as the country headed into 2019, "we've got a range of factors that are boosting the economy," he told Newshub on Wednesday. 

"First and foremost, the Government has pumped a lot of money into low and medium income households via its families package. We've also got good agricultural growing conditions, and the housing market is improving."

The families package - which was promised ahead of the 2017 election - would see around 384,000 households get an average of $75 extra per week. It included winter energy payments for superannuitants and beneficiaries to help with heating costs.

As for the housing market, the latest QV House Price Index shows residential property values across New Zealand have increased over the past year by 3.2 percent and by 1.2 percent in the three months to December. 

"We've got unemployment dropping away, and I think businesses are starting to feel this and starting to realise that while the economy's slower than it was, it's not all doom and gloom," Mr Stephens said.

There is still pessimism among businesses, however, according to NZIER's Quarterly Survey of Business Opinion. Around 18 percent of businesses still expect business conditions to get worse over the next six months - an improvement on the 28 percent last quarter.  

ANZ's December 2018 survey of small firms found that business confidence has lifted among firms, with 36 percent of small businesses pessimistic about general business conditions, down from 44 percent. 

"Pessimism still dominates small business confidence, despite the uptick in confidence in the December 2018 quarter," ANZ's managing director of retail and business banking Antonia Watson said.

"Regulatory requirements have been the top issue for surveyed businesses for over a year now, with lack of skilled staff also a growing concern, reflecting New Zealand's tight labour market and slowing net migration flows."

Firms are facing high labour costs, margin pressure, and credit constraints, while uncertainty about future demand is weighing, amidst lingering angst about political changes, the ANZ report says. 

Mr Stephens said that while business confidence is improving, businesses are saying they're not able to lift their prices because of rising costs, such as the looming $1.20 minimum wage increase the Government promised last month. 

Nevertheless, Mr Stephens said he thinks business confidence is going to lift further as the economy continues to grow over 2019, "in response to stimulus form the Government and improvement in the housing market". 

"Business confidence is heavily influenced by the fact that we've got a left-of-centre Government so often business confidence drops away when you get a Government that may be heavier handed on the regulatory front."

ANZ's report suggests that growth will remain "modest" in the short term and that growth above three percent is behind us. But it says there's need for a "pick-me-up" to get the economy back on a strong path. 

"We don't expect the economy to tank. But nonetheless, we don't think growth's going to be sufficient to achieve inflation sustainably near the two percent target midpoint.

"In our view, the Reserve Bank of New Zealand will eventually need to cut the official cash rate to give the economy a boost."

Prime Minister Jacinda Ardern promised in July last year there would be no new surprises for businesses, after business confidence slumped to a seven-year-low last year.