Another week, another weak business confidence survey. This time around it’s the turn of the NZIER’s Quarterly Survey of Business Opinion (QSBO), though the result is consistent with the more frequent ANZ Business Outlook (ANZBO) which is showing firms to be pessimistic (on average) about the near-term outlook for the economy.
A further consistency between both surveys is that firms are more upbeat about their own outlook than they are the economy is general, though this is now only marginally positive and on a deteriorating trend.
Our earlier take on the rationale for business pessimism was the inevitable policy uncertainty that followed a change of Government. We also noted that the longer businesses stayed pessimistic, the more likely this was to generate pessimism about their own firms’ outlook and thus have a deleterious impact on hiring and investment intentions and economic activity more generally.
While we still hold to the latter point, the reasons for the pessimism have become broader based. Policy uncertainty lingers, but there are also now more specific concerns about rising costs and its impact on profitability, rising capacity constraints, and the strength of demand, especially in light of the recently softer-than-expected March quarter GDP out-turn.
Furthermore that combination of concerns is leading to a deterioration in expected profitability. Investment intentions were softer, though hiring intentions have held up better. But importantly an increasing number of firms expect costs to rise in the period ahead and to pass those higher costs on.
So what does this mean for growth, inflation and the RBNZ?
While March quarter growth was weaker than expected, some of that will prove transitory (delays in the importation of motor vehicles, the timing of Easter). More generally population growth remains strong, the government’s Families Package came into being on July 1st, global growth is the strongest since the GFC and the terms of trade are close to a record high.
For now we remain happy with our view that growth will be stronger in the second half of the year than it was in the first half, but the downside risks are rising. Much will depend on the balance of reasons behind the weaker confidence (particularly capacity constraints) and how firms respond to that.
As for inflation we expect headline inflation will be at the mid-point of the target band by the end of the year. Key word in that sentence is “headline”. Reasons for the recent lift in or inflation forecasts include exchange rate weakness, higher petrol prices and increased excise taxes.
The RBNZ is more interested in core inflationary pressures. We expect core inflation to remain subdued in the immediate period ahead but to eventually begin to tick up assuming the unemployment rate remain below NAIRU (which it currently is) and wages move higher.
Wage growth is already looking solid given planned increases in the minimum wage and the size of public sector wage claims currently under negotiation. They will also be mindful of the upward pricing intention trend in the recent business surveys.
Furthermore with respect to the growth outlook, the RBNZ is not as concerned about the absolute level of growth as they are about the path of growth relative to its non-inflationary potential. If business investment falls, growth falls, but so too does potential growth. Lower growth can still be consistent with higher inflation in a capacity-constrained economy.
While the focus is on business confidence it’s important to also note that Consumer Confidence, has moved a little lower in June and is slightly below its long-run average. All the same, another reason the RBNZ is unlikely to ease the OCR is that doing so could easily provoke a round of “Mortgage Specials” from the banks, which would risk undoing the lending moderation the RBNZ seems to have achieved via the macro prudential toolkit. Households’ propensity to save is still trending down, so rate cuts now risks encouraging another bout of leveraging up.
That said the odds of a cut have risen in recent weeks and the RBNZ has certainly signalled a willingness to cut should the outlook warrant it. And it’s certainly the case that if they do anything soon, it’s more likely to be cut than a hike.
Despite the RBNZ’s balanced view as to whether their next move is a hike or a cut, we still think the next move is a hike, but it’s a long way away. Critical to that view is that the growth outlook remains OK and that key capacity constraint measures (most importantly the unemployment rate) remain consistent with higher inflation in time.
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