ANZ economists say their latest Business Outlook Survey 'makes for grim reading' but is encouraging for the Reserve Bank in its inflation battle

This month’s ANZ Business Outlook survey "makes for grim reading", according to ANZ chief economist Sharon Zollner.

"But it also provides confirmation that inflation pressures are waning," she says.

"More meaningful progress on getting non-tradable inflation down is in the pipeline, which barring any nasty inflationary surprises should in time restore the quiet confidence the RBNZ [Reserve Bank] was previously exuding that they’ve got this, allowing rates to fall.

"But for now, many firms are struggling to see the light at the end of the tunnel."

Zollner said overall business confidence fell 4 points to a reading of +11 in May. Expected own activity fell 2 points to+12, and past own activity lifted 2points to -18.

Activity indicators improved for the manufacturing sector off weak levels, but were mixed to weaker elsewhere.

There was, however a "welcome" easing in inflation indicators. Pricing intentions fell 5 points to 42 whileinflation expectations eased from 3.8%to 3.6%

Zollner says the May ANZ Business Outlook survey shows firms "feeling the strain", but overall, it was encouraging for the RBNZ.

"The manufacturing sector was, surprisingly, much chirpier this month, but the services sector is now feeling the chill as the economic slowdown broadens.

"It's all part of the RBNZ’s plan. We’re optimistic that they’ll be able to cut the OCR [Official Cash Rate] earlier than they expect as slowing domestic demand continues to weigh on CPI inflation pressures.

“Reported past activity, which has the best correlation to GDP, remains weak at -18%. This indicator suggests positive GDP growth in Q1, but Q2 is looking nothing flash at this point with two months of data in."

Last week the RBNZ actually stretched out the timeframe for when it sees the first OCR cut - now not seeing it till the second half of 2025 as it reacted to domestic inflation levels for the March quarter that were stronger than it expected.

Zollner said also encouraging for the RBNZ in the latest survey was "finally a fresh low" in the net proportion of firms intending to raise their prices in the next three months.

"There’s still a long way to go, but any step in the right direction is welcome. The proportion of firms expecting higher costs remains stubbornly high."