Business confidence falls sharply, inflation worries rise

Tuesday, 18 January 2022

A net 34 per cent of firms expected business conditions to deteriorate.

Business confidence fell sharply in the three months to the end of December, according to a survey of business opinion conducted by the New Zealand Institute of Economic Research.

The institute (NZIER) said more than half of businesses raised prices in the December quarter and a net 65 per cent planned to do so this quarter.

“These results point to inflation pressures in the New Zealand economy remaining strong over the coming year,” it said.

ANZ said the survey data was evidence that labour market conditions and inflation were probably even further beyond the Reserve Bank’s targets “than they or we thought” when the central bank issued its last monetary policy statement in November.

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The bank noted a net 34 per cent of firms expected business conditions to deteriorate, which was an increase from only a net 11 per cent expecting worse conditions in NZIER’s September-quarter survey.

The survey showed capacity constraints and cost pressures were “a huge issue”, ANZ said.

That, combined with disruption and uncertainty caused by the Delta outbreak were weighing on overall economic activity and business confidence, it said.

The Reserve Bank is due to issue its next monetary policy statement on February 24, with a rise in the official cash rate to 1 per cent widely assumed.

“The policy prescription is clear – interest rates need to rise further in order to tame the once slumbering inflation beast,” ANZ said.

“But with the economy struggling against supply constraints and Covid disruption, and confidence falling, downside risks to economic growth are very real.”

A net 1 per cent of firms reported they experienced lower activity in the December quarter in the NZIER survey, compared to a net 12 per cent reporting more business the previous quarter.

ANZ says the Reserve Bank’s main focus will need to be inflation.

But the proportion expecting an increase in activity in the quarter ahead was little changed at a net 8 per cent, versus 9 per cent previously.

A net 18 per cent of businesses surveyed also expected they would be taking on more workers over the following three months.

“Firms have been very successful at luring people into the labour force from inactivity. But with the border still closed, firms will have to continue to sweeten the deal in order to keep attracting people into the labour force,” ANZ said.

“That’ll only add to the other cost pressures driving inflation higher and higher.”

ANZ bluntly said the labour market was “not consistent with low and stable inflation”.

“As we begin the New Year, it’s clear that the Reserve Bank’s main task will be bringing inflation back down to earth.”

Stats NZ is due to release the December quarter inflation figure on Thursday next week, after a rise in inflation to 4.9 per cent the previous quarter.

Some economic forecasts have begun to diverge as economists take different views on the impact that higher interest rates could have on the economy.

In December, the Treasury slashed its prediction of how much debt the Government would need to run up over the next few years, after forecasting unemployment would be lower and tax revenues much higher than it had previously expected.

The Treasury was predicting a strong rebound from the Delta lockdowns with 4.9 per cent GDP growth in the year to June 2023, and annual GDP growth sitting a little above 2 per cent in the following three years, in a forecast that was finalised on November 10 before the discovery of the Omicron variant.

But research firm Capital Economics forecast last week that an economic downturn and falling house prices would persuade the Reserve Bank to stop its cycle of interest rate rises much earlier than expected in August.

It forecast the next two years would see a 10 per cent drop in house prices from peak to slump, weaker spending and OCR cuts towards the end of 2023.

Correction: an earlier version of this story incorrectly reported that the survey had been conducted by ANZ, rather than NZIER. Amended at 12.40pm, 18 January, 2022.