Latest plunge in confidence sends 'strong warning signals' and talk of interest rate cut

Wednesday, 27 June 2018

A sharp fall in business confidence in June has ignited debate that the Reserve Bank may look to cut the official cash rate to a fresh record low.

On Thursday the central bank will review the cash rate and is widely expected to leave the OCR unchanged at 1.75 per cent, where it has been since November 2016.

Most economists expect the next move for the OCR - eventually - to be an increase, the monthly ANZ business outlook on survey showed confidence had fallen back to those of late 2017, which represented the lowest level since the global financial crisis.

Asked about their general outlook for the entire economy, a net 39 per cent said they expected conditions to deteriorate in the coming year, a fall of 12 points on May.

Survey participants were more upbeat about the likely activity in their own business, with a net 9 per cent optimistic, but this was a 5 point fall from May and remains well below the long term average.

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ASB senior economist Mark Smith said there were several potential catalysts for the fall in confidence, from uncertainty about the direction of the government, global trade frictions and the Mycoplasma Bovis outbreak.

The bank expected business confidence to gradually improve this year because of 'widespread supports' to the economy. 'However, the longer business confidence remains low, the more questions that will be raised over the economic outlook,' Smith said.

'An OCR cut cannot be ruled out if this persists.'

The survey said that finding skilled staff was the most common problem seen by businesses, followed by regulation. Raised as a problem by 17 per cent of businesses, it was the highest reading for this problem since this data started being collected in March 2012, ANZ said.

While the monthly figures fluctuate, business confidence has been falling since June 2017, ANZ senior economist Liz Kendall said.

A composite measure combining business and consumer confidence, pointed to the economy continuing to grow 'but suggests the economy may continue gently losing steam over coming months, despite the support coming from fiscal stimulus and high commodity prices,' Kendall said.

Retail was the most pessimistic sector in both general outlook and own activity expectation. Profit expectations fell sharply, with a net 13 per cent of businesses expecting profits to be lower. All sectors expected a decline in profit aside from construction, which expected no change.

BNZ head of research Stephen Toplis said while there were 'strong warning signs' contained in the survey, talk of cutting the OCR was premature. Inflation expectations climbed from 2.13 per cent in May to 2.29 per cent in June, consistent with BNZ's view that inflation would return to 2 per cent - the Reserve Bank's target - within six months.

Toplis also doubted that economic growth would fall in the way the survey implied, with the own activity measure suggesting annual growth of 1.5 per cent.

'This simply can't happen. In fact we think growth is more likely to accelerate than decelerate from here. And while businesses are very aware of the negatives that are out there, they probably haven't thought enough about the positive momentum that will stem from the upcoming fiscal stimulus.'

Nevertheless, Toplis said the ANZ survey, coupled with other indicators, represented 'very strong warning signals', including concerns about regulatory changes and a sharp drop in hiring intentions..

'It doesn't matter whether uncertainty about a new government is justified or not, what we do know is that uncertainty causes deferred investment and that means lower actual and potential economic growth,' Toplis said.

'If employment growth slumps, as intimated by this survey, then economic activity will be adversely affected too.'