Business confidence continues to rise as ‘margin squeeze’ eases

The business outlook is on the up, ANZ says.

Business confidence has continued to rise, according to the latest ANZ Business Outlook survey.

While that is broadly good news for the economy, ANZ chief economist Sharon Zollner said the surge in confidence might present an upside risk to Reserve Bank plans for interest rate cuts.

“The September ANZ Business Outlook survey highlights the risk that the economy’s response to lower interest rates could be more vigorous than is generally expected.

“Markets in particular are focused on downside risks, but this month’s survey showed not only that optimism about the future continues to grow, but also the first signs of improvement in current activity.”

A sharper rebound in economic activity than generally anticipated would of course be great news – as long as inflation still returns sustainably to target.

In August, business confidence rebounded to the highest level in a decade on expectations of interest rate cuts.

September’s survey showed business confidence rose another 10 points to +61, while expected own activity lifted 8 points to +45.

Experienced own activity rose 4 points to -19, led higher by retail and construction, but experienced employment fell 5 points to -20.

Inflation expectations were flat at 2.9%.

The proportion of firms intending to raise their prices in the next three months lifted for a third consecutive month. The average amount by which firms are expecting to raise their prices in the next three months was also well off its June trough.

“But in good news from the RBNZ’s point of view, reported wage growth has dropped over the last six months, and no doubt relatedly, cost expectations have dropped steadily as well,” Zollner said.

Reported wage increases versus a year earlier fell from 3.3% to 3.0%. Expectations for firms’ own wage increases over the next 12 months were flat at 2.7%.

“It’s notable that when we ask firms who are planning on increasing or decreasing their investment what the main drivers of that decision are, interest rates don’t feature strongly. Rather, it’s the indirect impact on the economic outlook that is the deterrent.”

“If firms in aggregate don’t actually think interest rates at these levels are much of a deterrence, and if confidence about the economic outlook continues to grow rather than petering out, that certainly raises the possibility that investment could recover more quickly than we, or the Reserve Bank, are anticipating.”

However, firms reported inflationary problems (finding labour, high wages, high other costs, and regulation and paperwork) continue to decline in relative importance.

The largest single problem now was low turnover.

“Now we’ll be looking to other data such as card spending, dwelling consents, and job ads to corroborate or challenge the themes from the Anzbo. While the market seems confident rapid rate cuts are coming, everything remains data dependent”.

“Forward-looking activity indicators were higher again,” Zollner said. “Reported past activity also lifted. It’s still very weak, but there was a turn higher in the hardest-hit sectors of construction and retail and it’s also notable that late-month responses averaged -9, compared with -22 at the start of the month.”

Firms’ estimates of changes in their own costs over the next three months generally ticked lower but pricing intentions were mixed.

“Implied margin squeeze is retreating, which is no doubt feeding into improved profitability expectations, along with higher expected turnover,” Zollner said.

“Looking at the construction sector, both forward and backward-looking activity indicators have lifted markedly. Time will tell if activity will lift as strongly as anticipated (watch dwelling consents). Meanwhile, cost, wage and price indicators for the sector are trending down.

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. To sign up for his weekly newsletter, click on your user profile at nzherald.co.nz and select “My newsletters”. For a step-by-step guide, click here.