Autumn chill as business confidence falls sharply

The autumn chill has taken a toll on business confidence. Photo / Richard Robinson

ANZ’s April Business Outlook survey shows a clear weakening in activity and profitability as cost pressure continues to bite.

Business confidence fell eight points to +15 in April. Expected own activity fell nine points to +14, and past own activity dropped 13 points to -20.

“Cost pressure was particularly persistent,” said ANZ agri economist Susan Kilsby.

Reported past activity, which had the best correlation to GDP, dropped sharply, with double-digit falls seen in every sector except construction, she said.

“The economy-wide measure of past activity suggests the economy may eke out low but positive growth in [the first quarter], but momentum is pretty shaky if this month’s results are anything to go by.”

Turning to inflation indicators, the proportion of firms expecting they would face higher costs and/or would have to raise prices in the next three months both lifted in April, although not by much.

“Firms’ numerical estimates of where their own selling prices will be in three months’ time lifted marginally. The downward trend remains intact, but the descent has been slower over the past eight months than it was previously,” Kilsby said.

“The magnitude of expected cost increases also lifted this month, indicating inflationary pressures are persisting.”

The measure of average costs three months from now lifted in April, with the construction sector having the lowest expected cost increases.

“There was better news for the Reserve Bank in reported past wage increases, which fell from 4.4 per cent to 4 per cent,” Kilsby said.

Expectations for wage settlements over the next 12 months also fell.

Activity indicators were subdued, but many cost and inflation pressures increased, Kilsby said.

Possible culprits included the rising price of oil as tensions in the Middle East escalate and a decline in the Kiwi dollar over recent months (though it was now 1 per cent off its lows), she said.

These factors were pushing up the cost of imports.

“The minimum wage increase on April 1 is another source of cost inflation, though this was a considerably smaller increase than in previous years,” she said.

“As long as the demand side of the economy remains constrained, and that’s certainly written all over this survey, the RBNZ can very reasonably hope that cost-push inflation pressures can wash through with little in the way of second-round effects.”

“But it is certainly a reminder that the path back to the target inflation midpoint is unlikely to be a smooth one, and a 5.5 per cent peak in the OCR remains conditional,” she said.

“Inflation still remains a long way above the target band, and domestic inflation pressures have eased a lot more slowly than the RBNZ expected when they called a halt to OCR hikes in May last year”.

Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.