Latest ANZ Business Outlook survey shows firms showing more confidence about the future even as they report worsening current trading conditions

The country's businesses are gamely looking for better things in the future - even as they are reporting ever lower levels of current activity.

The latest ANZ Business Outlook survey for July shows that business confidence jumped 21 points to +27 and expected own activity lifted 4 points to +16. 

But ANZ chief economist Sharon Zollner is describing the bounce in these forward-looking indicators as having "a bit of a ‘well, can’t get any worse’ vibe to it”.

"Reported past activity, which has the best correlation to GDP, fell further to a net 24% of firms reporting that activity in the previous month was lower than a year earlier," Zollner said.

"Most sectors continue to deteriorate, with construction and retail the weakest sectors by quite some margin. The economy-wide indicator is looking very soft," she said

In terms of the things that the Reserve Bank would be paying attention to in its fight to get inflation back into the 1% to 3% target range (the annual rate was 3.3% as of the June quarter), the pricing and cost intentions of businesses "took a breather" in July after a solid fall in the previous month.

"Overall, things continue to move in the right direction – not at a speed that suggests inflation will fall faster than the RBNZ expects, but rather suggesting the RBNZ can have more confidence in its forecasts of inflation returning sustainably to the target band," Zollner said.

“Firms’ numerical estimates of where their own selling prices will be in three months’ time lifted for every sector except services, though not in a way that threatens the downward trend.

“The overall average lifted from 1.2% to 1.4%."

Zollner said that encouragingly for the RBNZ, the 29% of survey responses that came in after both the RBNZ Monetary Policy Review on July 10 and the CPI (inflation) data on July 17 showed lower inflation expectations, pricing intentions and particularly cost expectations (interest rates are a cost for many businesses).

“The activity indicators were not notably different.

“The magnitude of expected cost increases for the whole sample eased from 2.7% to 2.5%.

“Reported wage increases versus a year earlier lifted from 3.6% to 3.8.

“Arguably more importantly for the inflation outlook, expectations for wages over the next 12 months were pretty steady at a rate the RBNZ would likely be quite content with, were it to come to fruition."

Zollner said that with increasing evidence that the RBNZ's monetary policy has worked "and possibly rather too well", there is now a widespread expectation that the RBNZ will commence easing the Official Cash Rate [from its current 5.5%] this year.

But she cautions...

"Just as it took time for the pain from rate hikes to feed through into the broader economy, lower rates will not provide immediate relief to many.

“With unemployment rising and fiscal policy now far less expansionary, things are likely to feel worse before they feel better."

However...

"But the evidence is mounting that the inflation dragon is on its last legs, which sets the New Zealand economy up for a more robust recovery than if the job were half done."