The latest ANZ Business Outlook survey has landed with the best possible combination of results - with confidence up and inflation expectations down.
“Goldilocks is in the building,” wrote ANZ chief economist Sharon Zollner, referring to outlook being not too grim and not too upbeat. So, hopefully, just right for a soft economic landing.
Business confidence lifted another nine points in August to -4, the highest read since mid-2021. Expected own activity also jumped 10 points, to +11.
“While activity indicators are still at subdued levels, they lifted across the board,” Zollner said. “But we can have our cake and eat it too, for now, at least - inflation indicators continued to ease.”
Despite a reported lift in capacity pressures, inflation expectations and pricing intentions continued to ease, slowly but steadily.
“Things could be (and were) worse, according to what firms are telling us in our survey,” she said.
“Many firms appear to have been pleasantly surprised at how well demand has held up, considering; and the Reserve Bank has stopped raising the OCR, which may be creating a sense that the worst is over.
“Workers are much easier for firms to find but unemployment is still very low, and inflation signals are dropping away very tidily.”
Bank economists are loath to get too involved in political debate, but historically, topline business confidence has tended to lift on the arrival of National governments, and to fall under Labour.
That raises the possibility that recent polling favouring a centre-right coalition win in October may be behind some of the buoyancy.
But while Zollner acknowledged the influence different governments have historically had on topline business confidence, she noted that hasn’t been the case for firms’ own expectations.
And these had also risen sharply in the past month.
In fact, both confidence and own expectations had been following a slow but steady upward path for eight months, suggesting the trend predated recent polling, she said.
However, different sectors were reporting very different outlooks, Zollner noted.
“The agriculture sector is certainly in a very different world, with prices and expected profitability plummeting, but on the other hand, the construction sector appears to have taken real heart from the turnaround in the housing market.
“Does it add up to enough to get inflation all the way down to the target band sustainably? Here’s hoping.”
Higher activity but easing inflation pressures indicated a positive supply shock, she said.
This year’s surge in labour supply certainly fits that bill, but there will inevitably be demand impacts from net migration too, particularly in housing, and the net inflation impact remains a matter of conjecture.
“Pricing intentions are trending lower in a broad-based fashion. Firms’ views on where they see their own selling prices [being] in three months’ time fell to 2 per cent (from 2.4 per cent in July).”
Firms’ expected costs in three months’ time relative to today eased from 4.3 per cent to 3.6 per cent, continuing its downward trend. A small tick higher for manufacturing and construction was outweighed by falls elsewhere.
“The data implies that on average, firms continue to expect margin compression, given costs are expected to lift more than prices over the next three months,” Zollner said.
“Expected cost increases are now virtually identical to expected wage increases, whereas over 2022, other costs (physical inputs, transport costs, rent, compliance costs etc) were expected to rise even faster than expected wages, dragging up total expected cost increases.”
As a key component of both firms’ costs and household incomes, wage growth was an important determinant of non-tradable inflation, she said.
Reported past wage increases (versus a year earlier) ticked up to 5.6 per cent. On the other hand, expectations for wage settlements over the next 12 months fell from 4.1 per cent to 3.7 per cent.
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.