Are we at ‘peak bad’ for the economy?

By Susan Edmunds of RNZ

New Zealand’s business confidence might have soared - but perhaps only because the country has reached “peak bad”, one economist says.

ANZ’s business outlook survey on Thursday showed more than 50% of respondents expected the economy to improve over the year ahead - compared to 27.1% in July. It was the highest level in a decade.

A net 37.1% expected their own businesses to grow.

ANZ’s consumer confidence survey also showed an increase in August, although still to levels below its 10-year average.

But in an environment where retail sales are still 8.2% below their mid-2021 peak, construction is going through a downturn in building activity and the number of restaurants and cafes has shrunk for the first time in decades, how can businesses be feeling so positive?

BNZ chief economist Mike Jones said part of it would be relief that interest rates were starting to come down.

He said the second theme in the research was a “yawning chasm between the light on the horizon and the still-dark conditions they are experiencing now”.

He added: “The indicators referencing how things have been going are still terrible but the forward-looking indicators are clearly lifting a lot. It does seem to be the case that things are so bad now that the only way is up.”

Jones said it aligned with a view that this was “peak bad” for the economy.

“We may be at the absolute bottom of the cycle right now. That seems to be what businesses are saying in the business confidence release. We’ll have to see if the incoming data and information justify that. It does need to be seen in the context of some of the other information coming in that’s still extraordinarily weak.”

ANZ senior economist Miles Workman said it was important to acknowledge things were still very tough for many businesses and households.

“We saw that this week with yet another monthly fall in the number of filled jobs [data for July]. One thing that stood out in our business outlook survey was that most of the improvement was in the forward-looking indicators while [very recent] indicators remained subdued,” Workman said.

“So this is perhaps more of a sign that things are going to get better than a sign that the economy is currently on a solid footing.

“At the same time, the business survey data hint that the economy could bounce back faster than we are all forecasting as the Reserve Bank takes it foot off the breaks. That could become a concern for the Reserve Bank if it stops the disinflation process in its tracks, so they’ll need to continue to tread carefully.”

A meaningful recovery would need increased wages as well as moderation in the rising cost of living, Shamubeel Eaqub says. Photo / Kenny Rodger

Independent economist Shamubeel Eaqub said confidence was an important part of recovery but it was not sufficient on its own.

“People are hopeful that things are looking up because interest rates are coming down and things surely can’t get any worse.”

But he said business and consumer confidence was completely disconnected from actual spending and economic activity.

“There’s nothing wrong with optimism. We want people to have hope that eventually things will get better. Confidence is a necessary but not sufficient condition [for improvement].”

He said on the other side of Christmas, if the Reserve Bank cut interest rates as expected, and people had the benefit of increased wages as well as moderation in the rising cost of living, that would be a powerful driver of things “starting to knit back together”.

-RNZ