Business confidence is at rock bottom, as the Reserve Bank’s efforts to use aggressive interest rate hikes to cool inflation are successfully dampening people’s appetites to spend.

A net 73 per cent of businesses surveyed as a part of the New Zealand Institute of Economic Research’s (NZIER) Quarterly Survey of Business Opinion (QSBO) saw general economic conditions deteriorating.

This was the weakest reading in the survey’s history.

The survey was done between November 28 and January 9, following the Reserve Bank on November 24 suggesting it would lift interest rates higher than initially expected, likely orchestrating a recession in the process.

While the survey results suggested businesses were bracing for tough times ahead, they revealed their starting point was not atrocious.

A net 13 per cent of respondents reported a decline in activity over the prior quarter. This was the weakest since June 2020, when the full impact of the first Covid-19 lockdown was captured, but not a particularly bad result.

Businesses told the NZIER that staff shortages remained acute, with their search for labour continuing to be their main constraint.

This will worry the Reserve Bank, as it’s wary of the effect wage hikes are having on consumer inflation.

But on the flipside, businesses said they were becoming more cautious and were looking to reduce staff numbers and pare back on investment plans.

A growing portion also started to report sales as the primary constraint for their businesses, suggesting weakening demand is beginning to impact more businesses.

Businesses said rising costs were hampering their profitability, even though they were passing some of these costs on to customers by hiking prices.

The NZIER said these price hikes point to high inflation persisting in 2023 – another cause for concern for the Reserve Bank.

ANZ senior economist Miles Workman said, “The big worry in these data is the fact that costs and pricing lifted for both the past quarter (Q4) and the next (Q1).

“That’s going the wrong way, and suggests near-term inflation pressures remain acute (and far too high for the Reserve Bank to call these data ‘comforting’).”

As for the survey result’s impact on shares, Harbour Asset Management’s Shane Solly said the weak results are a “warning signal for earnings expectations for more cyclical New Zealand stocks”.

Coming back to the survey, builders and retailers were the most downbeat.

A net 77 per cent of firms in the building sector expected economic conditions to worsen.

“The pipeline of housing and commercial construction for the coming year continues to decline, while that for Government construction work has moderated,” the NZIER said.

“These results suggest construction activity, especially residential construction, will start to ease over the second half of 2023…

“While most building sector firms still reported intense cost pressures, the proportion of firms that increased prices continued to fall in the December quarter.”

As for retail, a net 76 per cent of retailers expected a deterioration in economic conditions.

Weaker demand is limiting their ability to hike prices.

The NZIER noted almost half of mortgages are due for repricing over the coming year, meaning many mortgages will be rolling off historically low fixed-term rates of around 2 to 3 per cent onto significantly higher rates of 6 to 7 per cent.

This should drive slower retail spending over the coming year.