New Zealand heading towards recession - bank survey

Laptop survey
Key business indicators are negative, including confidence, profit expectations and employment. Photo credit: Getty.

Key business indicators show New Zealand has entered into recession, a new bank report says.

Based on responses from approximately 400 New Zealand businesses, an ANZ Business Outlook Survey for June shows that a net 63 percent of businesses expect profits to be lower in the coming year.

"Coming out of COVID-19 lockdown, a vigorous bounce is evident in the numbers, but the levels are consistent with our view that the recession is just starting," the report said.

Just over a third of businesses surveyed expect to reduce staff in the next 12 months and 37.4 percent said staff levels were lower than a year ago. A net 26 percent expect weaker activity for their business.

Although New Zealand's fast exit from COVID-19 lockdown is currently the envy of the world, loss of international tourism continues to put pressure on the economy.

"New Zealand, with a closed border, is a significantly smaller economy and the recession is just starting to make itself felt," the report said.

Business confidence lifted from -41.8 percent in May to -34.4 percent in June.  ANZ senior economist Miles Workman, said that while business confidence stabilised over June and some indicators began to lift, key indicators were still in contraction, consistent with recession.   

"We've had this very severe shock induced by the COVID-19 lockdown and that's been associated with a very sharp contraction across all the business activity indicators," he said.

The bank currently forecasts a 19 percent contraction in Gross Domestic Product (GDP) in quarter two, followed by a sharp rebound in quarter three.

"From a momentum perspective, that rebound is just trying to get that level back up: that underlying momentum is still going to be a lot weaker than what it was before this crisis," Workman added.

Business confidence in the retail sector showed signs of improvement (-21.5 percent), indicating a release of pent-up demand following COVID-19 lockdown.

"We're cautious about the bounce in retail: [the data] is before recessionary feedback loops (e.g. uncertainty and unemployment) begin to take hold," he said.

Business confidence in the agricultural sector improved from May to June, a likely reflection of strong commodity prices. However, the net confidence score was still markedly low, at -63.3 percent.

"The agricultural sector remains very concerned about profits and credit availability...employment intentions deteriorated more than most over the month," the report said.

In the construction sector, business confidence was -47.5 percent. The sector was the most negative in expected activity but the outlook improved through June.    

"Construction is probably the beginning of those recessionary dynamics: this is a very volatile component of Gross Domestic Product (GDP) investment broadly generally contracts a lot more than other components of GDP during downturns," Workman said.

Other key outtakes from the report were rising concerns about credit availability in the manufacturing sector. For the agricultural sector, concerns were around regulation and finding skilled labour.