Latest ANZ Business Outlook Survey shows a drop in business confidence and activity levels - but inflation expectations have risen again

The latest ANZ Business Outlook Survey has recorded a drop in business confidence and activity levels - but another rise in inflation expectations.

"It’s a stressful time for businesses. Costs are still rising rapidly, and passing these costs on has become more difficult as customers become more price sensitive," ANZ senior economist Miles Workman said.

"Many firms have been chronically understaffed for a long period and the strain is telling. And economists are out there warning that interest rates are going to keep going higher (and house prices likely lower) until the New Zealand economy goes into recession or something close to it.

"If the global economy doesn’t side-swipe us first, that is."

The survey, covering the October month, showed that business confidence fell 6 points in October to -43, while expected own activity dipped 1 point to -3.

Workman said most forward-looking activity indicators slipped a little. Responses received after the unexpectedly strong CPI inflation figures last week were weaker on average.

Expectations of future inflation rose again to over 6% after falling in the September survey.

"Economy-wide inflation pressures are still very strong. Pricing intentions and costs are falling – but they are still far too high," Workman said.

Commenting on the survey results, Westpac senior economist Satish Ranchhod said while the survey doesn’t signal that inflation pressures are getting worse, inflation pressures remain intense, "and we’re not seeing any material signs that they have started to abate despite the large rise in borrowing costs over the past year". 

" Overall, today’s report, along with other recent developments, supports our expectations for a jumbo-sized 75 [basis points] hike [to the Official Cash Rate] from the RBNZ at its upcoming November policy meeting."

"As regards a specific numerical estimate of where firms’ own selling prices will be in three months’ time, the highest were in the retail sector. While not the lowest, construction sector pricing intentions have fallen the most since peaking early in the year."

On construction, sentiment in residential construction remained very much in minus territory - but did bounce quite a bit off the record lows seen in the previous month.

Back on the survey more generally, Workman said the survey asks firms their expected costs in three months’ time relative to today.

He said expected cost increases bounced back up this month in every sector except manufacturing, "perhaps reflecting the weaker NZD".

"They are very high across the board, particularly bearing in mind that the question asks where costs will be three months from now, not a year ahead. On average, firms are still expecting margin compression, in that costs are expected to go up around 6.2% over the next three months, but prices by only 4.3%."

Workman said reported past wage settlements showed "mixed movements", but were unchanged in aggregate at 6.5%.

"Expectations for wage settlements for the next 12 months increased 5.6%. The labour market remains exceptionally tight.

"With all that going on, it’s no wonder headline business confidence remains very subdued. But firms are clearly still very busy, and are soldiering on.

"The economic outlook is certainly murky, but the New Zealand economy has a lot going for it. Debt is higher, but nowhere near the worrying levels other economies are struggling under.

"We’re relatively insulated from the energy cost implications of Russia’s invasion of Ukraine. Our primary export base is food, and when it comes down to it, people gotta eat.

"Overall the economy is still surprising economists with its resilience. It’s a rougher path ahead, but the country is still moving forward."