Business confidence on mend as inflation fears start to ease

The construction sector is among the most upbeat.

Business confidence continues to improve.

The latest ANZ Business Outlook survey for February showed both confidence in the broader economy and expectations about their own performance lifted for the second month in a row - albeit from historically low levels.

Business confidence lifted another 9 points in February to -43. Expected own activity also lifted 7 points to -9.

In January the survey net 52 per cent of businesses had a negative view of the economy – itself an 18-point improvement from December when a net 70 per cent were downbeat.

There were also signs in the February survey that inflation pressure is starting to ease.

“Pricing intentions continue to inch lower but inflation expectations remain stuck around 6 per cent,” said ANZ chief economist Sharon Zollner.

“On pricing measures, a net 71 per cent of firms in the retail sector expect to raise their prices in the next three months – still high, but well down from a peak of 96 per cent six months ago.

“Overall, firms expect their selling prices in three months’ time to rise 3.4 per cent, down slightly. A general downtrend remains evident in expected costs too. The economy-wide measure eased from 5.8 per cent to 5.2 per cent.

“The data imply that on average, firms continue to expect margin compression, given costs are expected to lift more than prices.”

The implied margin compression was the most extreme for agriculture.

There was also a marked drop in expected wage growth.

“Overall, firms are anticipating to raise wages by considerably less in the next 12 months than they did in the last,” Zollner said.

The survey period began on January 31, shortly after the initial Auckland flooding.

A glance at the Auckland numbers at that time showed the Auckland region was actually considerably more optimistic, Zollner said.

Between the first wave of responses and the 25 per cent that were received later in the month, the minimum wage was increased and Cyclone Gabrielle hit, but any major shift in outlook was hard to discern.

“We’re unable to disentangle the effect, if any, of the minimum wage increase announcement.,” Zollner said.

“Also, the initial direct impacts of the cyclone are not captured in this month’s survey – understandably, as very few responses were received from the North Island east coast regions following the flooding.”

The shock value of the November Monetary Policy Statement appeared to have faded as firms focused on the risks and opportunities that were now front and centre, she said.

“Opportunity is clearly still knocking. That said, the level of most indicators remains subdued – firms are still very wary, and understandably so. But they are getting on with the job”.

By sector, construction, retail and services drove the improvement over the month, with manufacturing and agriculture much more mixed.

Agriculture remains the most pessimistic.

Employment intentions saw the largest widespread monthly bounce relative to typical historical moves.

“It suggests that firms put plans on ice for a while but may now be deciding to get on with things.

Pricing intentions remain the data that were most dramatically above their historical average, with costs in second place.

Expected profitability sits the lowest below its historical average, consistent with the margin squeeze implied by the relative movements in costs and prices.

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