New Zealand companies have been hit hard by the economy, with sales slowing as growth slows

(Bloomberg) — New Zealand companies are pessimistic about the outlook for the economy and their own business prospects, as slower growth dampens demand for their goods and services.

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A net 59% of firms expect the economy to worsen, the New Zealand Institute of Economic Research said in its second quarter report in Wellington on Tuesday, citing business opinion. A net 13% said their own business declined in the period, and 17% expected a decline in the three months to September.

Activity has slowed as high interest rates weigh on demand, and while economists expect the country to emerge from recession in the current quarter, many expect it to quickly stumble into another.

In May the Reserve Bank raised its official cash rate to 5.5% – a hike of 5.25 percentage points from October 2021 – and signaled the end of its tightening cycle. The RBNZ expects weaker demand to start easing inflationary pressures.

„There are signs that the impact of higher interest rates is gaining traction in the economy,” said NZIER Principal Economist Christina Leung. „We see that soft demand picture coming.”

Demand is increasingly becoming a barrier for businesses, Leung said. 42% of companies cited slow sales as the biggest factor limiting their ability to expand. In contrast, just 25% cited labor as their biggest obstacle.

The cooling function is to ease capacity pressures and the difficulty of detecting labor declines. A net 10% of firms reported trouble finding unskilled workers, up from 37% in the first quarter.

Cost pressures continue, with 70% of respondents saying they rose in the quarter. However, expectations for a price hike in the third quarter are low, Leung said.

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„This should give the RBNZ a measure of confidence that things are moving in the right direction,” he said. „The RBNZ does not need to hike further this cycle.”

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