Stagflation risk as building sector struggles
Survey shows firms face rising cost pressure they are unable to pass on to buyers
Profitability in the building sector is being squeezed as firms face rising cost pressure but are unable to pass that on to buyers, a new business confidence survey shows.
The latest Quarterly Survey of Business Opinion (QSBO) survey conducted by the NZ Institute of Economic Research (NZIER) shows overall confidence now at its lowest since March 2020, when the pandemic first hit.
It prompted ASB economist Mark Smith to warn that stagflation may be on the horizon.
Stagflation is a state where the economy is suffering from high inflation and recession — the worst of both worlds.
The QSBO for the June quarter made grim reading and offered “little to cheer optimists”, Smith said.
“[It] depicted stagflation-like conditions for the business sector, with shrinking economic activity, still intense capacity pressures and soaring prices and costs.”
The risks of a hard landing for the economy continued to increase, although he noted that recession was still not ASB’S base case.
If there was a bright spot it was that the survey showed the resilience in economic conditions in recent months, said Westpac senior economist Satish Ranchhod.
“The survey gauge of trading activity over the past three months nudged higher, albeit to a still low level of -0.9. That’s consistent with modest — but still positive — economic
growth in the June quarter,” he said.
“It certainly doesn’t point to a second quarter of decline in economic activity after GDP sank in March as a result of Covid-related disruptions.”
Consistent with the resilience in activity, there had been a pick-up in hiring and overtime worked through the June quarter, he said.
“The number of businesses who are looking to take on new staff also remains elevated.”
The services and building sectors were most downbeat in the June quarter, the QSBO found.
A net 71 per cent of services sector firms and a net 70 per cent of building sector firms expect a worsening in conditions.
For both these sectors, it was a big turnaround from the optimistic mood a year ago, said NZIER principal economist Christina Leung.
Despite the solid pipeline of construction work, the building sector was facing acute capacity constraints stemming from a shortage of workers and materials, she said.
“This is underpinning strong cost pressures, but the proportion of firms who were able to raise prices has fallen.”
There were signs that demand was starting to slow, she said.
The survey showed a decline in architects’ reported activity with regards to housing construction work.
However, in contrast, the pipeline of government construction work rebounded strongly, and there had been a slight pick-up in the pipeline of commercial construction work.
A net 22 per cent of building sector firms reported materials as the primary constraint on their business. About 53 per cent of building sector firms reported stocks of raw materials as being too low. This was a sharp lift from the 11 per cent in the previous quarter.
This had led to a further deterioration in profitability for the building sector, said ANZ senior economist Miles Workman.
However, labour shortages were still the main concern with 57 per cent of firms in the sector reporting that as the primary constraint on their business.
The latest QSBO told the same broad story as last week’s ANZ Business Outlook, he said.