Two key themes about the economy came through in NZIER’s latest Quarterly Survey of Business Opinion (QSBO), published last week. Firstly, the labour market continues to soften across the board, with a range of labour market indicators at their weakest since around 2009. Secondly, there has been a further moderation of cost and price pressures throughout the economy, with these indicators at their lowest since 2020/21.

In this analysis, we delve into how the QSBO helps inform us of likely labour market and inflation outcomes ahead of official data from Stats NZ. We look briefly at how the Reserve Bank uses the survey data in its monetary policy decisions, and what yesterday’s OCR announcement told us about the Bank’s latest thinking.

It is becoming increasingly difficult for people who are unemployed or looking to change roles to find a new job. From an employer perspective, the QSBO showed that finding labour is the easiest it has been since 2009, indicating there are more people competing for fewer job opportunities.

Labour turnover over the past three months told a similar story, at its lowest since 2009, indicating that people are staying in jobs at the moment due to the lack of other available opportunities.

Employment over the past three months was also the lowest since 2009. Job ad figures for May from MBIE confirm this weakness, with ad numbers down a massive 33% from May 2023.

The QSBO provides a good lead indicator of likely trends in official labour market data, such as the Household Labour Force Survey (HLFS), over the next 3-6 months, particularly when the results across the different QSBO questions are telling a consistent story. We have examined the relationship between a range of employment indicators from the QSBO and HLFS employment.

In Chart 1, we compare net employment from the QSBO over the last three months1, advanced for one quarter, against the annual percentage change in employment from the HLFS. The two series follow a similar trend, with the deterioration in the QSBO results over the last six months indicating that employment in the September quarter could be down by 0.7% compared to a year earlier. This result would be the first annual decline in employment since 2012. It is also weaker than our previous expectations that saw unemployment rising through job growth not keeping pace with population growth, rather than through job losses of any magnitude.

With continued cost-of-living pressures and mounting job security concerns, households are still tightening their wallets. Businesses are feeling the same pressures as households as rising input costs and pressure on revenue hammer profitability. Businesses are less willing and able to pass increasing costs onto consumers through price hikes, as they compete for more limited household spending.

According to the QSBO results, the net proportion of firms lifting average prices over the last three months compared to a year earlier was the smallest since 2021, just six percentage points above the long-term average. Average costs over the past three months showed a similar easing trend, with the net response 10 percentage points above the long-term average.

In Chart 2, average prices over the last three months from the QSBO, advanced one quarter, are compared to annual CPI inflation. The similar trend between these two series suggests that headline inflation is continuing to slow and could slip below 3%pa in the September 2024 quarter.

The Reserve Bank looks at the QSBO in preparing its Monetary Policy Statements and forecasts, alongside other indicators of economic activity, the labour market, and inflation. The value of the QSBO is its timeliness in helping to understand activity over the next one to two quarters, but of course the Bank needs to be looking ahead by 12-18 months when setting monetary policy.

A recent study in 2021 by the Bank looked at which QSBO measures are the best at forecasting employment growth, inflation and GDP growth. The Bank found that profitability expectations, investment intentions for plant and machinery, and experienced domestic trading activity provided the largest improvements when included in basic forecasting models for the various official data series. In general, these other series reiterate the economy’s weakness.

• Domestic trading activity is at its weakest, excluding the 2020 lockdown, since 2009.
• Investment intentions recorded their third-weakest quarter since 2009, and were only lower in June 2020 (lockdown) and December 2022.
• Expected profitability remains close to its average since 2019, over which time it has generally been deeply negative.

These trends reiterate that the economy is under significant pressure and, if inflation is clearly moderating back to within the 1-3%pa target band, the Bank should be starting to seriously consider cutting interest rates.

The official cash rate (OCR) was held at 5.5% at the Reserve Bank’s review yesterday. The Bank’s dovish tone is more in line with softening in inflation and labour market pressures shown in the QSBO figures, compared to the hawkish tone in the previous announcement when a rate hike was considered.

Despite the change in tone, we still expect the first interest rate cut to come in February 2025, but the outlook and possibility of a rate cut before the end of 2024 should become clearer with the forecasts published in the Bank’s August’s review.

2 The QSBO net measure of employment over the last three months is calculated by subtracting the percentage of respondents saying they employed fewer people than the same quarter last year from those respondents saying they employed more people.