Market Update: Business confidence rises to highest level since 2014 – Full Analysis

Westpac senior economist Michael Gordon said the survey showed a more upbeat attitude among businesses than had been seen for some time.

“Activity is picking up, and hopes for the months ahead have continued to strengthen,” he said.

“Notably, demand for workers is responding quickly, and some pockets of skill shortages are already emerging.”

In the survey, the measure of firms’ own trading activity was improving.

A net 3% of firms reported a decline in activity in their own business in the December quarter.

Intentions about hiring and investment have also increased, with a net 5% of firms increasing staff numbers in the December quarter, and a net 22% planning to hire in the next quarter.

Survey respondents also shared their intent to increase investment in buildings (net 11%), and plant and machinery (net 7%) over the coming year.

There were also early signs spare capacity in parts of the New Zealand economy was reducing.

That was reflected in the NZIER QSBO labour market indicator, which showed a small proportion of firms finding it more difficult to find skilled workers in the December quarter.

Meanwhile, firms continue to report it being easier to find unskilled workers.

Sector breakdown

In sectors surveyed, all reported improved sentiment.

The manufacturing sector was the most upbeat in the December quarter, with a net 56% of firms surveyed feeling positive about the general economic outlook for the coming months.

In the September quarter, it was the least optimistic sector.

Most building sector firms surveyed were feeling more upbeat.

But despite the rise in confidence, actual demand was soft, with building sector firms reporting reduced new orders and output in the December quarter.

Architects surveyed expected a reduced pipeline of housing, commercial and government construction work over the coming year.

The longer-term outlook was more positive, with expectations of recovery in the pipeline of housing and commercial construction work for the next 12 to 24 months.

The soft construction demand reduced the pricing power of building sector firms, which caused more deterioration in building sector profitability.

And the NZIER said “a notable proportion of retailers expect a recovery in the next quarter”.

Boxing Day sales data released on Monday showed the popular shopping season was down on 2024 by 12.4%.

Survey respondents were able to raise prices over the quarter, but said profitability remained weak as cost pressures intensified.

The services sector was also optimistic about economic conditions in the year ahead.

Key to that optimism was the belief that many households would face reduced mortgage repayments as they rolled over to lower mortgage rates this year.

Inflation pressures

Cost and pricing indicators point to easing inflation pressures, with a net 37% of firms reporting higher costs in 2025’s final quarter.

The proportion of firms raising prices in the December quarter did pick up slightly but the building sector was the exception.

A net 31% of building sector firms reported cutting prices in the December quarter in the face of weak construction demand.

The NZIER said the developments suggested spare capacity remains in the economy, especially in construction.

“With demand starting to recover but inflation remaining contained, we expect no further OCR cuts in this monetary policy cycle.”

The institute expected the OCR to trough at 2.25% until the Reserve Bank started ramping the rate up in the second half of 2026.

‘No OCR implications’

ANZ senior economist Sharon Zollner said the economy is improving, spare capacity is being eroded and disinflationary pressures are abating.

“To our eye, the suite of capacity indicators in today’s release aligns closely with the RBNZ’s expectation that the output gap narrowed in Q4,” Zollner said.

“Today’s data suggest it would be appropriate to look through some of the strength in the Q3 GDP.”

She said on the costs and pricing front that the signal today is mixed, suggesting disinflationary pressures are beginning to abate.

But with CPI inflation in the target band and capacity measures still consistent with a negative output gap, Zollner said that shouldn’t worry the RBNZ too much.

“We don’t see any implications here for our OCR call. We expect the Reserve Bank to hold the OCR at 2.25% in February and await more data.”

Tom Raynel is a multimedia business journalist for the Herald, covering small business, retail and tourism.