New Zealand businesses turned noticeably more upbeat in June, and they grew less worried about inflation at the same time, in a survey that lands just two days before the Reserve Bank sets interest rates.
The ANZ Business Outlook survey, released at the end of last month, showed headline business confidence lifting to a net 36.6 in June from 10.0 in May. That number is a net figure, meaning the share of firms expecting better general conditions in the year ahead minus the share expecting worse. A net 37 percent of businesses said they expected conditions to improve, up 27 points in a single month.
The measure ANZ watches most closely is not that headline reading but firms’ expectations for their own activity, because a business is a better judge of its own order book than of the wider economy. That own activity gauge rose to 36.9 from 25.6. Just over half of the firms surveyed, 51 percent, expected to do more business over the coming year, 14 percent expected to do less and 35 percent expected no change, which leaves a net 37 percent pointing up.
The more important detail for the Reserve Bank sits underneath the confidence figures. Firms’ expectations for inflation a year out fell to 3.36 percent from 3.63 percent. Their own pricing intentions, the net share of businesses planning to raise their prices, dropped to 50.7 from 56.7, the lowest reading since November. Cost expectations eased to 85 from 90. Economists pay attention to pricing intentions because what firms actually plan to charge is a more direct guide to where inflation is heading than the backward looking headline rate, which measures prices that have already moved.
That matters because those signals point in the opposite direction to the headline inflation number. New Zealand is living through an oil price shock. Fuel costs jumped when conflict flared in the Middle East, and the Treasury’s Budget update in late May had forecast annual inflation to peak at around 4.0 percent in the June quarter, with higher petrol prices adding roughly a full percentage point to that figure on their own. On paper, an economy with rising confidence, an inflation rate near 4 percent and a central bank being urged to tighten looks like one where price pressure is building, not fading.
The survey suggests the pressure businesses feel is easing rather than building, and the timing of the responses is the reason it is worth reading carefully. ANZ chief economist Sharon Zollner noted that most firms answered before the ceasefire in the Middle East and the sharp fall in oil prices that followed in the second half of June. The rebound in activity was concentrated at the very start of the month, before petrol came back down. In other words, businesses were already turning more positive on the strength of underlying conditions, and the later drop in fuel costs was not what lifted the mood. Zollner said the Monetary Policy Committee would be feeling its way carefully in the coming months as it weighed how quickly the economy can bounce back against how long the initial oil cost shock will linger now that crude has dropped back.
That judgement lands on the Reserve Bank’s desk this week. The next official cash rate decision is due on Wednesday, with the rate currently sitting at 2.25 percent. Economists widely expect a hold. The harder question is what comes after. Major bank forecasters, ANZ among them, expect the Reserve Bank to start lifting the cash rate from September, and the International Monetary Fund has urged it to begin raising rates to head off the inflation the oil shock could feed into the wider economy. A survey showing firms are less inclined to pass on higher costs, and expect lower inflation a year from now, cuts the other way. It is the kind of evidence that argues for patience rather than an early move.
The other thread running through the numbers is a gap that has dogged the New Zealand economy for more than a year. Confidence and expectations have run well ahead of what firms are actually doing. Businesses have repeatedly told surveys they expect a recovery while reporting that demand in front of them remains soft, and the interest rate cuts delivered since August last year have been slow to show up in real activity. June’s jump in the own activity gauge is a sign that the promised pickup may finally be arriving, but a single month of survey data is a fragile thing to lean on, and it will take firmer readings on spending, hiring and output to confirm it.
For households, the practical stakes are straightforward. If businesses hold off on price rises and the labour market steadies, the case for the Reserve Bank keeping rates on hold strengthens, which keeps mortgage costs where they are for longer. If the oil shock proves stickier than the survey implies and feeds through into the prices of other goods, the bank moves closer to the rate rises the banks and the IMF are already forecasting. Wednesday’s decision will not settle that argument, but the reasoning the Reserve Bank sets out alongside it will show how much weight it is putting on the softer signals in surveys like this one against the harder number on the petrol pump.
The June survey was reported by RNZ and covered in detail by interest.co.nz.
What do you make of the mood among businesses right now, and do you think the Reserve Bank should hold or start lifting rates? Share your thoughts in the comments below.
This article was written by AI, briefed to report the facts, hopefully without some of the bias people bring to the job 🙂
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