Inflation expectations took a decent step lower, economist Sharon Zollner said. Photo / Alex Burton
Inflation expectations took a decent step lower, economist Sharon Zollner said. Photo / Alex Burton
The ANZ Business Outlook survey for December shows both an expected and an experienced rebound in activity.
Business confidence rose 2 points to +33 and expected own activity rose 3 points to +29.
“The vast majority of indicators lifted. Inflation expectations took a decent step lower, but the proportion of firms expecting higher costs or intending to raise their prices both rose,” ANZ chief economist Sharon Zollner said.
“Indeed, pricing intentions are the most reliable lead indicator for inflation of late, and they have stopped falling in recent months.”
The survey suggested the outlook was improving and the backward-looking questions suggested that experienced activity may also be past the worst, she said.
The rebound in residential construction intentions was especially striking, suggesting consents may soon start lifting meaningfully, Zollner added.
“Things are clearly very weak on a per capita basis, but population growth of more than 2.5 per cent does put a floor under how far aggregate activity can fall.”
The RBNZ had noted that the surge of workers had had a disinflationary impact on the labour market, but that the demand-side pressures were still playing out and could yet cause inflation to hold up longer than anticipated, she warned.
“The inflation indicators in the survey were mixed at best, which is not encouraging data for the inflation outlook.
“While GDP data showed the RBNZ has gotten a lot more traction than they knew last month, and that’s very important, it’s also important to remember that a recession was their plan, and that the question of how much pain is needed to get inflation all the way down to 2 per cent isn’t in fact settled.”
Adrian Orr and the Reserve Bank have had a bigger impact on inflation recently than many had anticipated. Photo / Mike Scott
If pricing continued on a downward trajectory they’d be rapidly approaching “normal” ranges by now, the survey said, but instead they’re looking stuck at a level consistent with CPI inflation, well above the target band.
Firms’ expected costs in three months’ time relative to today was more encouraging, insofar as the downward trend remained in place. The economy-wide measure was stable at 3.4 per cent.
“The data imply that on average, firms continue to expect margin compression, given costs are expected to lift more than prices over the next three months (3.4 per cent versus 2.2 per cent). But the gap is smaller than it has been.”
Reported past wage increases (versus a year earlier) fell markedly and were clearly trending lower. Expectations for wage settlements over the next 12 months held steady at 3.6 per cent.
“Reported past activity has a good correlation with both the Quarter Survey of Business Opinion (QSBO) experienced domestic trading activity and GDP.
“It’s consistent with the economy continuing to gradually lose momentum on an annual-change basis. It ticked up this month, but more evidence would be required to call a bottom.”
The surge in residential construction intentions was startling, Zollner said. It suggested that dwelling consents (and before long, residential construction) were about to find a floor.
“We ask additional questions every three months, including what firms’ largest problems are.
“Finding skilled labour still rates as firms’ largest problem. However, the share of problems that are inflationary continues to decline, while the disinflationary problems of low turnover and competition are growing.”
Of those firms intending to increase their investment, far fewer are doing it to replace hard-to-find labour, and more are investing due to the economic outlook.
Of those intending to invest less, wariness about the domestic economic outlook was still highest on the list.
Overall, while confidence is up, we’re still left with a picture of limited momentum in economic activity and lingering inflation pressures, Westpac senior economist Satish Ranchhod said.
“Those continued cost and price pressures chime with comments we’ve heard from our own business contacts who have reported that operating cost pressures remain firm,” he said.
“In many cases, they’ve also told us it’s become harder to pass cost increases into output prices. We expect that continued pressure on operating costs will mean that domestic inflation eases only gradually over the year ahead.”
