Could the coming year see better conditions for New Zealand businesses?

Better times could be just around the corner for battle-weary New Zealand businesses, a top economist has predicted.

The powerful headwinds of rising interest rates, rampant inflation and devastating natural disasters have resulted in significant challenges, and many firms have seen their finances squeezed over the past year.

As the Reserve Bank lifted the Official Cash Rate to take the heat out of inflation, consumers tightened their belts and economic growth has slowed sharply.

But the pain of higher prices belies a positive undercurrent that shouldn’t be ignored, according to Westpac NZ Senior Economist Satish Ranchhod.

“The reason inflation isn’t dropping quickly is because the New Zealand economy is still in good shape,” he says. “Some of the wind may have come out of the sails, but activity remains elevated, with high employment and plenty of new jobs being created.

“Under those conditions, it’s natural to see prices continue to track upwards, but we’re also seeing high wages that reflect the undiminished demand for staff.”

Encouraging signs

He believes inflation will soften over the coming year, with reversals in some of the big hikes in the costs of transport and materials.

“Interest rates look to be near their peak,” he says, “and pressure is likely to start coming off next year. There are also signs that both house sales and prices are stabilising, which is encouraging and will have a flow-on impact on areas like home building and spending on durables.”

For Ranchhod, an even more encouraging sign is the surge in net migration. The number of people arriving annually in Aotearoa on work visas has risen sharply, climbing to 171,000 in the year to June.

“Population growth is on track to hit 2.5%, which would be the fastest we’ve seen in decades, and its impacts will ripple through the economy,” he predicts. “For businesses, that means strong growth in the number of consumers. It will also help them with sourcing the skilled labour that’s been in such short supply.”

Entering a new phase

In the meantime, resilience is key to remaining competitive during the recovery.

“The fundamentals remain true,” he says, “and they include keeping a close eye on costs and retaining staff as the country shifts into a new phase of its economic cycle. The environment will continue to evolve, so businesses need to keep looking ahead and adapting to the inevitable changes in the way people work.”

Green shoots may be starting to show, but that doesn’t mean they’re ready to blossom just yet. Trading remains tough for many small businesses, with even those seeing healthy sales struggling to maintain equally healthy margins.

“If you continue to feel the pressure of rising loan servicing costs, it’s imperative that you speak to a financial expert as early as possible so you’re aware of all the options,” says Ranchhod. “With continuing significant changes in the economic landscape, support from a trusted bank or advisor remains vital.”