Lift in business confidence more evidence further rate rise ahead, says ANZ

Wednesday, 31 May 2023

On balance, businesses are still expecting worse times ahead, but pessimism is past its peak.

ANZ says its view that the Reserve Bank is likely to raise the official cash rate one more time this year has been reinforced by a monthly survey that suggests businesses are now less downcast about the economy.

The bank reported that its monthly survey of business confidence had found a net 31% of businesses believed general economic conditions would be worse in a year’s time than they are now.

But that was a significant improvement on their mood last month, when a net 44% of businesses expected worse times head, and the “least pessimistic” they have been since December 2021.

It is also a big step forward from the nadir reached in December when a record net 70% were forecasting worse times ahead in the wake of a hawkish Reserve Bank monetary policy statement in November.

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ANZ reported that only a net 4.5% of firms were expecting their own business’ activity would have dropped in a year’s time, down from 7.6% last month.

Businesses’ forecasts of future inflation “inched a little lower” and the proportion of firms expecting to raise their prices also eased, the bank said.

But it reported that the proportion of firms expecting their costs to increase in the next three months remained “stubbornly high”.

The survey comes in the wake of a new forecast from the Treasury in the Budget that the economy would escape a recession, but ANZ chief economist Sharon Zollner said it was conducted too early to be influenced by the Reserve Bank’s dovish monetary policy statement last week.

“We will have to wait until next month to see the impact of that,” she said.

The Reserve Bank forecast last week that the official cash rate had peaked at 5.5% and deputy governor Christian Hawkesby said there was now a “high bar” on further rate rises.

But ANZ said in its report on business confidence that it continued to expect the central bank would be “back at the hiking table by the end of the year”.

“The Reserve Bank perceives widespread sogginess across the economy, making it more relaxed about the extra stimulus being provided by super strong net migration and more fiscal spending this year than anticipated.

“We aren’t so sure. Things are patchy, certainly, but most activity indicators are well off their lows and rising, while cost and price indicators are inching lower, rather than plunging,” Zollner said.

“Even the most interest rate-sensitive sector, construction, is much less downbeat than previously.”