ANZ economists say firms are increasingly pessimistic about the outlook for activity and profitability; cost and inflation pressures remain high; profit expectations have sagged to low levels similar to those seen after the GFC

Overall business confidence has dropped to near record lows, while cost and inflation pressures remain extreme, but profit expectations are flagging badly.

Expectations for residential construction continue to fall - hitting a record low apart from during lockdown - "with very low levels suggesting a potential sudden stop ahead".

Those are the main points from the June ANZ Business Outlook survey, which paints an extremely glum picture of NZ Inc.

ANZ's NZ chief economist Sharon Zollner said the survey showed firms are increasingly pessimistic about the outlook for activity and profitability.

"Business confidence fell 7 points to -63% in June, while expected own activity fell 4 points to a net 9% expecting lower activity ahead.

“The suite of activity indicators were weaker across the board. Expected profitability is particularly dire,” she said.

“Employment intentions are holding up pretty well, but with the profitability outlook so pessimistic, one does wonder for how long this can remain the case."

Zollner said it made sense that the expected outlook is slipping, "with the RBNZ [Reserve Bank] on the inflation-fighting warpath, determined to cool the economy".

“For now, supply-side issues are firms’ biggest problems: finding skilled labour, costs, and wages being the top three. The RBNZ needs those problems to ease, and weakening demand to move up the charts. That’s what’s required to bring inflation pressure down.

“Of course, weaker demand might ease the overtime, but it’s unlikely to enhance profitability. That moment of happy equilibrium between demand and supply may prove fleeting, with the RBNZ entirely willing to incur the risk of a hard landing to ensure the long-term structural health of the economy in terms of well-anchored inflation expectations.”

Zollner said "supply-side issues" continue to dominate the list of firms’ biggest problems, consistent with inflation pressures that are still intense. The main reason firms are so pessimistic on the outlook for profitability is not lack of demand, but rather supply-side constraints and cost pressures.

“Finding skilled labour remains the #1 problem for firms, while non-wage cost inflation and high rates of pay continue to grow as problems.  And in the “other” category, 63% of the text comments related to supply chain problems.

“Traditional recession-type problems such as cashflow/debtors and low turnover remain well down the list, but interest rates are now warranting more of a mention, unsurprisingly.

“In such a supply-constrained environment, it makes sense that inflation pressures are holding up even as the activity outlook slows. The RBNZ is unlikely to conclude it can slow the pace of hikes any time soon. While pricing intentions, cost expectations and inflation expectations are all slightly off their peaks, the RBNZ will be looking for meaningful declines.

“On the wage front, upward pressure is accelerating outside of the agriculture sector as regards both past and expected future wage settlements. And while agricultural wage pressure is easing, it’s still the highest across the economy. This data will do nothing to ease RBNZ concerns about the potential for a wage-price spiral developing.

“On the investment front, for firms intending to invest more, the key factors are skilled labour shortages, the domestic economic outlook, the level of spare capacity, and central government policy, in that order.

“Amongst firms intending to cut their investment, the biggest factors are the domestic economic outlook, interest rates (rapidly growing in importance), skilled labour shortages (no point in buying that fancy machine if you can’t hire an operator), central government policy and the global economic outlook, in that order."