Business confidence rebounding, is it too soon for Reserve Bank’s inflation fight?

Construction sector confidence is improving. Photo / 123rf

Confidence in the economy is rebounding, according to the latest ANZ Business Outlook survey, but the positivity might end up making the Reserve Bank’s job harder.

Overall business confidence and firms’ own activity expectations both lifted in May, although in net terms, they remain in negative territory.

Business confidence lifted 13 points from -43.8 to -31.1, while expected own activity rose from -7.6 to -4.5.

Inflation indicators also eased, although cost expectations remained stuck at very high levels, ANZ chief economist Sharon Zollner noted.

“Firms’ specific numerical estimates of where their own selling prices will be in three months’ time eased or was flat for every sector except agriculture,” Zollner said. “It fell most sharply for construction.”

“The economy-wide measure continued lower, which is going the right way for the RBNZ.”

ANZ also surveys firms’ expected costs in three months’ time relative to today. A general downtrend was clear there too, Zollner said.

“Expected profitability remains under pressure, with every sector in the red.”

But while things were patchy and coming off a low base the trend was improving, something that was likely to put pressure on the RBNZ’s forecasts for inflation, she said.

“Most activity indicators are well off their lows and rising, while cost and price indicators are inching lower, rather than plunging. Even the most interest-rate-sensitive sector, construction, is much less downbeat than previously,” Zollner said.

That underpinned ANZ’s view that the OCR was unlikely to have peaked yet, despite what the Reserve Bank said last week as it lifted the cash rate 25 basis points to 5.5 per cent.

“We continue to expect that the RBNZ will be back at the hiking table by the end of the year.”

By sector, the construction, services and manufacturing sectors saw broadly improved sentiment in May.

The retail sector became more pessimistic – though not across the board, with a decent lift in expected profitability and intended employment, despite higher expected costs.

The outlook for labour demand was mixed.

ANZ chief economist Sharon Zollner. Photo / Supplied

The retail and services sectors both saw double-digit falls in employment intentions, whereas construction lifted markedly.

“Indeed, there was a massive increase in the construction sector’s own activity outlook this month,” Zollner said.

Overall, investment intentions were the lowest indicator compared to historical averages.

This is “no doubt related to subdued profit expectations as well as general uncertainty about the economic outlook with the RBNZ wanting a slowdown, and the upcoming election to boot,” Zollner said.

Pricing intentions were also a mixed bag over the month, with manufacturing and construction well down, but those for retail and services little changed.

“Retail, manufacturing and services’ pricing intentions are still at quite extreme levels,” Zollner said. “Expected costs were generally lower (except retail) and the level of the cost expectations series is no longer as extreme as it was.”

BNZ head of research Stephen Toplis described the results as “less bad” but still broadly “flat to negative” in tone.

He noted that the survey came in wholly before last week’s RBNZ Monetary Policy Statement (MPS).

“The MPS did take a lot of people by surprise, with its on-hold message on the OCR,” he said.

“This has the potential to entice business confidence and activity expectations a bit further out of their holes in the June/July editions (and hopefully not at the expense of stalling the gradual decline in its inflation pointers).”