The latest NZIER Quarterly Survey of Business Opinion (QSBO) has shown a drop in business confidence in the September quarter.

A net 15% of firms expect an improvement in general economic conditions over the coming months on a seasonally adjusted basis.

While the sentiment was positive, this was a decline from the net 26% expecting an improvement in the June quarter.

The QSBO is seen by economists as the last key piece of data for the Reserve Bank before tomorrow’s Official Cash Rate call.

With markets and economists split on whether we’ll get a 25 or 50 basis point cut, it has the potential to tip the balance.

Firms’ own trading activity showed a net 14% of firms reported a decline in activity in their own business in the September quarter, but a net 9% of firms expect improved demand in the next quarter.

A significant gap remained between firms’ experienced demand, which is still weak, and their expectations of improved demand ahead. For the past year, actual activity has fallen short of earlier expectations of a recovery.

Firms’ hiring and investment intentions have also reduced.

A net 23% of firms cut staff headcount in the September quarter.

Regarding investment, a net 13% of firms intend to reduce investment in plant and machinery, while a net 20% intend to reduce investment in buildings over the coming year.

The continued disappointing nature of the recovery in demand, combined with the volatile global backdrop, was driving heightened caution among firms, NZIER deputy chief executive Christina Leung said.

Manufacturing is the least optimistic across the sectors surveyed; only a net 3% of the manufacturers surveyed expect general economic conditions to improve.

The building sector remained cautiously optimistic, Leung said.

Christina Leung is a principal economist with the New Zealand Institute of Economic Research. Photo / Mike Scott

Construction demand remained weak, building sector firms reporting declines in new orders and output in the September quarter.

The soft construction demand was also reflected in the measure of architects’ work in their own office, which pointed to a flat pipeline of housing construction work and a reduced pipeline of commercial and Government construction work over the coming year.

While there was a drop in confidence, retailers remained the most optimistic sector surveyed in the September quarter, despite continued weakness in new orders and sales.

“Cost pressures in the retail sector remain intense, but the proportion of retailers able to raise prices eased,” Leung said.

“In responding to the intense cost pressures and weak demand, a substantial proportion of retailers also reduced staff numbers in the September quarter.”

The services sector showed a stark contrast between expectations of an improved outlook and weak demand reported by services sector firms.

“The optimism is likely to be supported by the widespread expectations of lower interest rates over the coming year,” Leung said.

“With over 40 per cent of mortgages due for repricing over the coming six months, we expect the reduction in interest rates to date will continue to support a recovery in retail and services demand over the coming year.”

The NZIER continues to forecast two further 25-basis-point OCR cuts from the RBNZ at the upcoming meetings in October and November.

“We expect annual CPI inflation to rise just above 3% over the coming quarters,” Leung said.

“However, continued excess capacity in the New Zealand economy should drive inflation back towards the RBNZ’s inflation target mid-point of 2% over the coming year.”

Westpac senior economist Michael Gordon said the survey reflected an economy that remained “sluggish”.

In terms of tomorrow’s OCR decision, the survey would likely further encourage those on the RBNZ Monetary Policy Committee who believed in August that a larger “circuit breaker” rate cut was appropriate.

“We continue to expect a 50bp cut to 2.50% tomorrow,” he said.

Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.