Company credit demand grows as Kiwis “get on with business” despite volatile economy

Demand for business credit has increased at the highest rate in two years as organisations press ahead with growth plans despite ongoing economic headwinds in New Zealand.

While only a single-digit spike at 6.3% during the second quarter of 2023 – compared year-on-year to the same period in 2022 – the swing represents a “positive sign” for Kiwi businesses ahead of the general election in October.

According to the Equifax Quarterly Business Credit Demand Index – June 2023, asset finance (+13.2%) and business loans (+7.2%) were the largest contributors to the quarter increase, with trade credit relatively soft (+1.1%) year-on-year.

The Index measures the volume of credit applications for trade credit, business loans and asset finance in New Zealand, with the latest data representing a “strong turnaround” from previous quarters.

“Towards the end of Q1 we observed some recovery in business credit demand which has flowed into the latest quarter,” said Angus Luffman, Managing Director of New Zealand at Equifax. “New Zealand businesses are getting on with business, with support from lenders.

“The availability and growth of business credit is a key foundation of economic growth. Business credit demand growth for Q2 was exhibited across the lender landscape, which indicates broad based demand growth.”

Of note to technology providers servicing key end-user sectors across the country, the rise in demand was led by transport (+29.7%), accommodation and food services (+16.2%) and manufacturing (+15.4%).

This was followed by agriculture, forestry and fishing (+10.9%), construction (+9.1%) and retail trade (+8.3%) which experienced an increase in applications across all forms of commercial credit. A notable decline hit rental, hiring and real estate services (-3.4%) however.

As IT investment continues to soften amid economic uncertainty and an upcoming election cycle, asset finance demand returned to growth during the second quarter, driven by accommodation and food services (+54.7%), transport (+53.0%), manufacturing (+40.4%) and construction (23.8%) sectors.

Luffman cited the agriculture, forestry and fishing sector as a “notable outlier”, up +2.4% compared to the same period last year.

“Activity in both services and asset building segments are an encouraging sign for broader cross sector activity,” Luffman explained. “Businesses investing in productive assets, either as upgrades or new, indicates broader economic activity and productivity.”

In addition, Luffman said trade credit applications (+1.1%) still remained “relatively soft”.

“We expect trade credit to remain subdued as businesses tighten trading terms to cope with the cash flow squeeze as costs continue to rise,” he added.

Recession softens, inflation eases

According to recent economic forecasts from Infometrics – a leading economic advisory firm based in Wellington – inflationary pressures are finally moderating throughout the New Zealand economy, following two years of costs and prices “running out of control”.

Data cited by Infometrics suggests that demand across the economy is moderating as higher interest rates and cost-of-living pressures squeeze household spending. With international inflation also abating, Infometrics said the Reserve Bank is now “on track” to get inflation back to the top of its 1-3%pa target bank by the end of 2024.

“Although inflation is still higher than normal, there have been signs that underlying cost pressures are becoming less broad-based, which is the reverse of the trend experienced during 2022,” noted Gareth Kiernan, Chief Forecaster at Infometrics. “Expectations about future inflation are also easing and previous disruptions to supply chains have dissipated.

“Weaker demand conditions mean that firms now have less pricing power, leading to sharper pricing and a greater degree of discounting than throughout the last three years.”

As the technology industry continues to battle rising salary demands, Kiernan said the labour market remains “tight” with wage inflation still “elevated”.

“But the influx of foreign workers over the last nine months is rapidly alleviating the most critical labour shortages previously caused by the border closures,” Kiernan added. “In terms of employment, businesses have been in catch-up mode in the first half of this year, filling roles that had been vacant for an extended period during 2022.”

As a result, Infometrics expects such pent-up demand for additional workers to peter out in coming months, with job growth expected to slip below population growth and wage inflation to moderate.

Within this context, annual net migration is set to peak at a record high of over 93,000 in the second half of 2023 but ease to a “more sustainable level” of below 40,000pa by the end of 2024 as the unemployment rate pushes up to around 5%.

“With fewer job ads indicating weaker hiring intentions, our central view is for a ‘fast up, fast down’ track for migration, but the current momentum in visa and arrival numbers poses a risk that migration heads higher and stays there for longer than we are currently forecasting,” Kiernan highlighted.

Whether a continued slowdown, a double-dip recession, or any other description, Kiernan said the economy is still going to look and feel weaker throughout the rest of 2023 and into 2024.

“That’s the price we’re paying to get inflation under control and put the New Zealand economy on a more sustainable path,” he advised. “At least we’re now seeing the effects of the tightening in monetary conditions coming through.”