Editorial: Tough economy might not last as inflation, growth improve

Waiting on an economic dawn. Photo / Brett Phibbs

Editorial

EDITORIAL

Business confidence is riding high... surprisingly high, given the economy is likely in recession.

If we just look at the top-line number in this week’s ANZ Business Outlook, then general confidence about the economy is as high as it has been in almost a decade.

The optimism has been building steadily since a record low a year ago as the economy battled high inflation and weather-related disasters.

A cynic might suggest it has risen in correlation with the fortunes of the National Party across the past year.

It is well-documented that the business community feels more comfortable with a centre-right government. That does translate to an extra point in confidence surveys.

There is no question that a new government creates a pathway for business optimism. So too does the prospect the Reserve Bank has inflation on the run and the next move for interest rates is down.

Unfortunately, the reality for the economy is more nuanced and the next few months look a lot more difficult than top-line confidence suggests.

For starters, businesses report both their costs and their own pricing intentions are still on the rise.

Expectations for cost growth were 3.4 per cent (unchanged), while expected price growth was 2.1 per cent. Meanwhile, overall inflation expectations were for 4.3 per cent.

In other words, however optimistic businesses might be feeling in general, the details suggest inflation is not yet beaten and at least the next few months will see them struggle to maintain revenue.

The other issue is that expectations for firms’ own business activity actually declined, suggesting they are realistic and bracing for what is likely to be a tough six months.

Essentially, the economy is either in recession or flat right now, and that is unlikely to change until the Reserve Bank starts to relax its interest rates stance - which it almost certainly won’t do this month.

The good news is that for businesses not too encumbered by debt, the timeframe before economic growth returns looks manageable.

Today, economics consultancy Infometrics upgraded its outlook for GDP growth this year from 1.2 per cent to 2 per cent.

That positivity is underpinned by the record-high net migration rate boosting New Zealand’s population - and with it, economic activity.

“Aggregate household spending will be boosted by having a larger population,” says Infometrics chief forecaster Gareth Kiernan.

It looks, then, that 2024 is shaping up to be a year of two halves.

Through these first six months, we will remain in the shadow of recession as unemployment rises but interest rates remain elevated, putting the squeeze on households.

But the signs of recovery are growing stronger. The Reserve Bank will soon have scope to offer some relief. The new Government should eventually be able to fight its way clear of coalition partner controversies and focus on providing a stable economic platform for growth.

Barring some further international meltdown, the pieces are falling into place for a much-improved economy in 2024 - just not quite yet.

For now, the message is: hang in there - it is always darkest just before the dawn.