Business confidence rebounded sharply in the June. Photo / NZME
Business confidence rebounded sharply in June but inflation pressures are building, with labour shortages now the worst ever recorded in the NZEIR Quarterly Survey of Business Opinion (QSBO).
The long-running survey, conducted by the NZ Institute of Economic Research, found a net 10 per cent of businesses now expect an improvement in the economic outlook – a turnaround from the net 8 per cent of businesses who had expected a deterioration in the previous quarter.
It also pointed to rising costs and building inflation pressure.
That's prompted ASB and BNZ economists to move their forecast for Official Cash Rate hikes forward to November this year.
"The inflation and demand gauges in the NZIER's Quarterly Survey of Business Opinion are so strong that it is increasingly clear that the RBNZ cannot afford to wait much longer before starting to reduce the amount of monetary stimulus currently in place," said ASB chief economist Nick Tuffley.
ASB and BNZ were the first of the two major banks to move their call to November.
A rate hike in February had already been fully priced in by markets. The Reserve Bank's current rate track points to hikes beginning in the middle of next year.
However, this may change at the next Monetary Policy Review later this month.
Tuffley noted that a net 39 per cent of firms in the survey increased selling prices over the June quarter – up from net 7 per cent.
It was a larger lift than expected, he said.
"This indicator is consistent with annual CPI inflation lifting to around 3.4 per cent. We feel the risk is that inflation pressures will move higher," Tuffley said.
"Against a backdrop of higher inflation expectations, the RBNZ is likely to become increasingly uncomfortable leaving the OCR at emergency settings."
The QSBO had removed any doubt that the economy was overheating and there was a case to be made for hiking rates now, said BNZ head of research Stephen Toplis.
But this would probably be a leap too far for the Reserve Bank, he said.
"The only questions now are when will rates rise and by how much? The when has clearly moved closer and so we formally move our rate hike call to November 2021".
The QSBO showed firms' own trading activity also picked up strongly, with a net 26 per cent of businesses reporting increased demand in the June quarter.
"These results suggest the recovery in the New Zealand economy will remain robust over the coming year," said NZIER principal economist Christina Leung.
But inflation pressures were building, with businesses reporting costs rising strongly, partly because of the difficulty in sourcing inventory, she said.
Despite that, firms were still looking to expand further through both hiring and investment.
"In particular, a net 15 per cent of firms increased headcount in the June quarter, while a net 20 per cent of firms are looking to increase investment in plant and machinery over the coming year," she said.
"This increased focus on investment in plant and machinery likely reflects the labour shortages that firms are facing, which is encouraging firms to consider the use of labour-saving technology."
That will be seen as good news by policymakers hoping that the squeeze on labour can raise business investment levels and boost productivity.
The scarcity of skilled and unskilled labour was the most acute on record over the history of the survey.
The survey showed demand was still strongest in the building and construction sector.
"The pipeline of residential construction work is particularly strong, in line with annual dwelling consent issuance rising to record highs," Leung said.
Against this backdrop of solid demand, capacity pressures were becoming more acute, she said.
"All up, these results reinforce our expectation that rate hikes are on the horizon," said ANZ economist Finn Robinson.
"We've pencilled in February 2022, but risks are pointing towards sooner rather than later. The economy is booming, and while there's still some softness in the tourism industry due to the border closure, the sheer strength in demand elsewhere is swamping this effect."
ANZ senior strategist David Croy said the Kiwi dollar had already taken on a firmer tone but that the QSBO report had added about 40 basis points to the currency.
"The market was already pricing in earlier rather than later rate hikes."
Croy last week said the risks were building that the Reserve Bank would lift rates this year.
"This [QSBO report] is like a red flag to a bull for a market like that," he said.
The market is now pricing in a 70 per cent chance of a rate hike by November, up from a 60 per cent chance suggested by market pricing yesterday.
The Reserve Bank's Official Cash Rate has been at 0.25 per cent since the Covid-19 crisis started early last year.
The central bank has also been buying billions of dollars worth of government bonds in order to keep interest rates low to stimulate the economy.
"The Reserve Bank has acted appropriately," Croy said.
"They absolutely did the right thing. It was entirely appropriate that they threw the book at it, so to speak, but the emergency has passed now and it's appropriate for the market to think about whether we need emergency policy settings for much longer," he said.
- additional reporting Jamie Gray