Soaring levels of business confidence in the wake of interest rate cuts have got the economists wondering how quickly the country's economy might get rolling again

Did somebody say interest rate cuts?

I hope they did, because the business community's got very excited about it.

Your writer is a long-time sceptic of opinion surveys (albeit a frequent writer about them) and so generally treats all results with caution.

However, the sheer magnitude of the surge in business confidence levels as measured by the ANZ's long-running Business Outlook survey deserves some special consideration. 

What are we seeing here?

This has all come amid an extended economic downturn that has seen GDP go backwards in four of the last six reported quarters and with the Reserve Bank (RBNZ) expecting that both the yet-to-be-reported June 2024 quarter and the September quarter we are now in will both see economic contraction. So, assuming that's right, we will have had six out of eight quarters with a negative GDP outturn. Already this current economic slump is bigger on a per capita basis than we saw after the Global Financial Crisis.

How do our businesses react? Well, by having their confidence soar to decade-high levels, according to the ANZ survey. Is this just a sugar-fuelled short-run hit brought on by some interest rate relief? Or do businesses see a genuine and fast-moving turning point?

Maybe the answer's somewhere in the middle. But I am intrigued by how quickly the economy might recover from a recession that was - by its own admission - engineered by the RBNZ.

To go back to my natural scepticism of opinion surveys, it's not so long ago that the self same ANZ survey showed rocketing confidence levels when that 'other lot' were finally ditched from government and the National-led Coalition took power last year. 

That particular surge in confidence was bashed back by the dire economic developments of 2024. 

So, what everybody wants to know, is whether this (and it has to be said, much stronger) surge in confidence is likely to be justified or not.

The Kiwibank economics team of chief economist Jarrod Kerr, senior economist Mary Jo Vergara and economist Sabrina Delgado note in their latest First View publication that since the RBNZ's August 14 Official Cash Rate cut "we’re already seeing a huge improvement in sentiment across businesses and households".

"Confidence and hope for better days is returning. That’s the feedback we’re receiving as we’ve travelled across the country to see a number of our clients. Now, we are also seeing the uptick in the confidence numbers."

The economists think that, looking ahead, "confidence should strengthen from here", though they still see the economy as having shrunk in the June quarter and expect "subdued" growth for the rest of 2024.

They say, however, that the massive lift in confidence lowers the chance for any 50 basis points cuts to the OCR, as are currently priced in the market.

"Our view is unchanged; we expect to see a steady glidepath down in the cash rate. We forecast another eleven 25bp cuts to 2.5% from the RBNZ into 2026."

In the NZ Institute of Economic Research (NZIER) latest quarterly predictions, NZIER deputy chief executive Christina Leung forecast GDP growth to remain weak over the coming year, "which should drive a further reduction in inflation in the New Zealand economy".

"Households have increasingly fixed mortgage rates for shorter terms in anticipation of imminent interest rate decreases. This shortening in the duration of the mortgage book should facilitate a faster transmission of monetary policy as lower mortgage rates flow through to households when it comes time to reprice their rates. 

"Nonetheless, the impact of lower interest rates will take time to flow through the economy. Activity and confidence indicators point to demand remaining subdued in the near term. Households remain wary about spending on big-ticket items, while businesses have become more cautious about hiring and investment," Leung said. 

In referring to both the ANZ's Business Outlook survey and the ANZ Roy Morgan Consumer Confidence Survey released last Friday, which also ticked up but not as much as the business survey, ASB's chief economist Nick Tuffley said there is likely to be "a large element of ‘candyfloss confidence’: a sweet sugar hit with not a lot of substance behind it", in the results.

"It does very much appear that even the speculation of falling interest rates was enough to create a more optimistic mood," he said.

"It is unlikely that we will see the economy suddenly roar into life, particularly given cashflows will improve only gradually. And it may prove difficult for this level of sentiment to be sustained. We are, though, encouraged that the economy should be back into growth mode after this current September quarter. The lifts in confidence do point to people being more prepared to take action rather than continuing to hunker down for what seemed like an indeterminant length of time. In an early indication of that response, realestate.co.nz reported a “noticeable” uptick in home buyer interest after the OCR cut last month."

ANZ chief economist Sharon Zollner in her weekly podcast this week commented on the "storming" results in the Business Outlook survey and "whether this is a flurry of wild optimism that won't last as reality bites".

"We'll have to wait and see, of course. But certainly, there's been a pretty big reaction to what was a fairly significant fall in interest rates over the month."

Zollner said the question was whether this surge in confidence was "going to manifest into action decision making".  Making an investment decision or employing someone, are, she said, pretty risky and expensive decisions.

"It would seem reasonable that the majority of firms will actually wait to see the actual expected stronger demand turn up before they make that kind of decision."

It is, she said, going to be interesting to see how the economy responds because the Reserve Bank and others in the economy are expecting the economy to respond only sluggishly to the rate cuts.

"And certainly that Business Outlook Survey does raise the possibility of other outcomes."

Zollner pointed out that this recession has been unusual in that it has been caused by interest rates and not some other negative shock.

"This has been pretty much just about monetary policy and therefore there has to be a possibility that the economy’s response to rate cuts could be more vigorous than expected and certainly more vigorous than is typically seen when rates are cut.  Because rates are normally cut because something really bad has happened and that’s not the case this time.

"So the housing market is obviously the key place to watch in terms of whether it’s going to change people’s behaviour quickly," Zollner said.

"It all comes down to the question of how much activity is pent up and has been waiting for this moment of the promise of better times ahead versus how much activity like investment and employment, buying houses whatever has been cancelled because times are so bad and cashflow so terrible and firms are struggling to survive – and there are certainly firms in that situation absolutely.

"So, what’s the mix? – The number of firms that have been in a holding pattern and are ready to roll again versus the proportion of firms just up against it and this is just a little bit of oxygen in the mask but they are really flat on the back.

"...It’s going to be a really interesting few months to see how this all pans out."

I'll second that...