Latest ANZ Business Outlook Survey shows some further improvement in activity indicators - but inflation expectations 'remain stuck around 6%'

Business confidence has lifted again this month along with expectations of future business activity, according to the latest monthly ANZ Business Outlook survey.

"February saw a further lift in all activity indicators in the ANZ Business Outlook survey, though many remain at very subdued levels," ANZ chief economist Sharon Zollner said.

“Pricing intentions continue to inch lower but inflation expectations remain stuck around 6%. There was a marked drop in expected wage growth, however."

Zollner said there was little difference between the early-month and late-month responses to the latest survey.

She said the survey period this month began on January 31, shortly after the initial Auckland flooding.

"A glance at the Auckland numbers at that time showed the Auckland region was actually considerably more optimistic."

Between the first wave of responses and the 25% that were received later in the month, the minimum wage was increased and Cyclone Gabrielle hit, Zollner said.

"We’re unable disentangle the effect, if any, of the minimum wage increase announcement. Also, the initial direct impacts of the cyclone are not captured in this month’s survey – understandably, as very few responses were received from the North Island east coast regions following the flooding."

Zollner said the "shock value" of the Reserve Bank's very hawkish November Monetary Policy Statement "appears to have faded into the rear-vision mirror as firms focus on the risks and opportunities that are front and centre". 

"Opportunity is clearly still knocking. That said, the level of most indicators remain subdued – firms are still very wary, and understandably so. But they are getting on with the job."

In terms of some of the detail in the survey, Zollner said a net 71% of firms in the retail sector expect to raise their prices in the next three months – still high, but well down from a peak of 96% six months ago.

"Overall, firms’ expect their selling prices in three months’ time to rise 3.4%, down slightly. A general downtrend remains evident in expected costs too. The economy-wide measure eased from 5.8% to 5.2%.

“The data imply that on average, firms continue to expect margin compression, given costs are expected to lift more than prices. The implied margin compression is most extreme for agriculture."

Zollner said wage growth is a key driver of non-tradables (domestically-generated) inflation, and the RBNZ is unlikely to stop hiking until wage-price spiral risks have convincingly dissipated.

"And here there was some encouraging news for the RBNZ. Reported past wage settlements fell from 6.7% to 6.0%, falling in every sector. And expectations for wage settlements for the next 12 months fell even more, down from 5.5% to 4.7%.

"However, expected wage increases were lower in the early-month sample before the minimum wage increase was announced.

“Overall, firms are anticipating to raise wages by considerably less in the next 12 months than they did in the last."