New Zealand Business Optimism Hits 12-Year High Amid Weak Demand

New Zealand businesses are approaching their highest level of optimism since 2014, but weak demand is preventing a corresponding increase in activity and pricing. The New Zealand Institute of Economic Research's (NZIER) Quarterly Survey of Business Opinion (QSBO) for the September quarter revealed that 40% of firms anticipate improved economic conditions, up from 14% in June. Despite this, only 1% reported higher trading activity, and 5% had reduced staff levels.

ASB's analysis highlighted that 64% of firms cited lack of sales as their biggest constraint, up from 57%. Retailers were the most optimistic sector, with 57% expecting better conditions, even as their sales and orders declined. Building firms also turned positive due to increased new orders.

Kiwibank's economists attributed weak demand to a subdued housing market, a slack jobs market, and stretched household budgets. They noted improving investment and hiring intentions, with Westpac reporting a net 23% of firms planning to hire, signaling a potential upturn in the December quarter.

Cost and pricing pressures eased, with fewer firms reporting higher costs and raising prices. NZIER noted that soft demand limited firms' ability to pass on higher costs, despite rising oil prices due to Middle East conflict. ASB concluded that there was 'no smoking gun on inflation.'

Bank economists are divided on whether the Reserve Bank of New Zealand (RBNZ) should continue raising the official cash rate (OCR). ASB and Bank of New Zealand (BNZ) expect a 25-basis-point hike in October, with ASB predicting the OCR to peak at 3.25% by the end of 2026, while BNZ forecasts it to reach 3.75% by March 2027. Westpac's Michael Gordon suggested the RBNZ had no compelling reason to abandon its pause, while Kiwibank warned that rate hikes could stall a fragile recovery.