Survey shows strong business confidence and growing inflation concern

Overall business confidence ebbed marginally lower in May from April, but concerns about capacity utilisation and inflation are growing, National Bank's monthly Business Outlook survey found. It noted however that the survey closed on May 14 before the worst of the financial turmoil in Europe hit global markets.

"Pricing intentions rose to +28, a level which is consistent with around 3 percent annual headline inflation, and this is before accounting for GST changes," ANZ senior economist Khoon Goh said.

"Adding to the inflation story is a further increase in capacity utilisation, a sign that the recovery is starting to use up spare resources in the economy at perhaps a quicker rate than we would have expected," he said.

So what?

Business confidence is remarkably robust, particularly about firms' own prospects. This is a sign that it is real and is likely to flow through into employment and investment. However, the signs about building inflation and capacity utilisation are a concern for the Reserve Bank as it prepares to raise the Official Cash Rate from its current record low of 2.5% as early as June 10 or July 29. On its own, this survey result would bolster the Reserve Bank's resolve to raise rates in the next two months. 

The only caveats are the European financial crisis has hit hard after the survey closed. But the New Zealand dollar has also fallen since then. I think the Reserve Bank needs to take its foot off the monetary accelerator on June 10. Economists are still prevaricating about whether June 10 or July 29 will be the dates. I think Alan Bollard needs to get on with it. Your view? Comments below please

Here is the full release below from National Bank and an interactive chart is below that.

Nothing seems to be denting the air of optimism towards prospects for the New Zealand economy. Headline business confidence fell from +50 to +48, but the level remains very high historically. Looking at the sectoral picture, all sectors bar manufacturing recorded a fall in confidence. In terms of the absolute level of confidence, the construction sector remains the most optimistic at +53 even though it showed the biggest drop in the month.

The agriculture sector continues to have the lowest level of confidence at +27. When we look at businesses’ assessment of their own activity, they seem to go from strength to strength, rising 2 points to +45, which is the highest own activity reading since May 1999.

Employment intentions rose 3 points to +16, the highest reading since April 2002 and is at a level which is consistent with around 4 percent employment growth. Investment intentions rose 4 points to +14, which is now above the historical average level and suggests we are on track for positive business investment growth, though at a gradual pace rather than anything more substantial at this stage. Profit expectations was the only activity gauge to post a decline in the month, down 2 points to +24 percent.

But it is still at a healthy level which, if translated into actual profits, should see firms act on their investment and hiring intentions. Our composite growth indicator from the survey continues to point towards a strong recovery ahead. The composite indicator is at a level which is consistent with over 5 percent year-on-year growth by the end of this year. While the growth story is very much welcome news, the inflationary undertone from this month’s survey is not.

Pricing intentions rose to +28, a level which is consistent with around 3 percent annual headline inflation, and this is before accounting for GST changes. Adding to the inflation story is a further increase in capacity utilisation, a sign that the recovery is starting to use up spare resources in the economy at perhaps a quicker rate than we would have expected.

The past month has seen the New Zealand dollar tumble, increasing unease towards the sovereign debt crisis in Europe, a selloff in global equities, mixed economic messages and an economy friendly Budget. Much of these developments were too late in the month to be captured by the survey.

Beyond that, firms simply seem to be focusing on what they can control and getting on with business. We take encouragement from this. But with so much going on after the close off date for this month’s survey (14 May), next month’s survey reading promises to provide some real insights into businesses’ thinking about the array of contrasting forces at play.