With the ongoing COVID-19 outbreak and resulting lockdowns in Auckland, Kiwi business confidence fell sharply in the fourth quarter ending December 2021. The Institute’s Business Opinion Survey New Zealand Economic Research Institute (NZIER) also showed that demand also fell in the same quarter.
The survey showed that many companies 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 capacity utilization measure fell to 89.5% from
96.1% from the previous quarter.
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The disruption and uncertainty caused by the Delta Variant outbreak weighed on overall economic activity.
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The survey reflects the continued weak labor market conditions and capacity constraints businesses are facing due to international and national border restrictions. According to the survey, given the uncertainty about the evolution of the pandemic, companies have become cautious about investments.
34% of companies expect general economic conditions to deteriorate compared to 11% of companies feeling pessimistic in the last quarter.
Labor shortages are the biggest problem
Businesses in all sectors are facing severe labor shortages. Most companies looking to hire, there is a shortage of skilled and unskilled labor. The companies have tried to sweeten the deal for the workforce, but this leads to higher costs for the companies.
According to the survey, 61% of companies reported an increase in costs in the December quarter. However, the retail and construction sectors saw the largest cost increases due to global supply chain disruptions due to the pandemic.
Due to high cost pressure, more than half of the companies raised prices in the quarter and others expect to increase in the next. This would lead to higher inflation and lower demand.
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Sluggish manufacturing and service sectors
Almost all sectors are feeling the heat, but the manufacturing sector was the most pessimistic with 34% of manufacturers expecting the economy to deteriorate in the coming months. The pessimism was driven by slowing domestic and export demand and growing cost pressure.
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The services sector was also sluggish due to the impact of tighter containment measures and strong cost pressures. The construction sector also reported a continued increase in costs during the December quarter.
Will interest rate hikes help the business climate?
In 2022, the main task of the Reserve Bank of NZ (RBNZ) is to control inflation. When it announces its monetary policy in February, it should raise the interest rate to control inflation. The actual inflation figures will be revealed when Stats NZ releases its December quarter figures next week to see if there has been an increase from the previous quarter’s 4.9%.
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Even though the Central Bank may raise interest rates to calm demand, supply-side constraints remain due to the uncertainty of the COVID-19 pandemic. Even though the Treasury expected the economy to rebound after the Delta variant lockdowns, the new Omicron variant added to the uncertainty and pessimism.
Conclusion: Many analysts are now predicting an economic slowdown and falling prices that would force the RBNZ to halt interest rate hikes.