ANZ economists say while the Reserve Bank is banking on the economy 'rolling over' rapidly 'we’re not convinced things are quite that weak'

ANZ economists see the economy as "patchy rather than capitulating" and say while the Reserve Bank is banking on the economy rolling over rapidly "we’re not convinced things are quite that weak".

ANZ's latest monthly Business Outlook Survey shows that business confidence lifted another 5 points in July to -13, still in the negatives, but the highest read since September 2021. Expected own activity, a better indicator for the state of the economy, eased 2 points to +1.

ANZ chief economist Sharon Zollner said the economy is slowing, "but certainly not coming to a sudden stop".

"Activity indicators were a mixed bag in July, but broadly, the gains from the previous month were more or less maintained.

"Lifts were seen in business confidence, export intentions, and residential construction intentions, but expected own activity slipped. Little changed: employment intentions, investment intentions, capacity utilisation and profit expectations.

"Inflation expectations and pricing intentions continue to ease slowly but steadily. The proportion of firms reporting higher costs did tick up slightly, but to put it in context, this question saw the biggest fall last month. The downward trend remains intact."

Zollner said firms remain wary, with most activity indicators subdued. At the same time, though, most indicators are well off their lows of late last year.

"The RBNZ is banking on the economy rolling over rapidly; we’re not convinced things are quite that weak.

"Fiscal stimulus, population growth, solid household income growth, and now a bottoming housing market, are meaningful offsets to the lagged impacts of tighter monetary policy, weakening export demand, and cost-of-living pressures.

"We are forecasting a recession and associated rising unemployment – we could hardly be accused of wild optimism. But we’d characterise things as currently patchy rather than capitulating," Zollner said.

Looking further at some of the detail, Zollner said a net 62% of firms in the retail sector expect to lift their prices in the next three months. That’s high, but it’s the lowest read since March 2021.

In terms of specific numerical estimates of where firms’ own selling prices will be in three months’ time, the average read was markedly lower at 2.4%, "and they are trending lower across all sectors".

The economy-wide cost measure ticked up slightly from to 4.3%, with lifts for agriculture and services offset by falls for retail, manufacturing and construction.

"The data imply that on average, firms continue to expect margin compression, given costs are expected to lift more than prices over the next three months," Zollner said.

"Wage growth is a key determinant of the persistence of non-tradables inflation. Reported past wage increases (versus a year earlier) fell to 5.5%, easing in every sector.

"Expectations for wage settlements for the next 12 months ticked down to 4.1% and continue to trend lower.

"Overall, a net 82% of respondents reported expecting to raise wages over the next 12 months. That’s up slightly from June, but well off its peak of 94% in June last year.

"Firms continue to anticipate that they will raise wages by considerably less in the next 12 months than they did in the last."