OCR cuts sooner than expected? Business confidence slumps in May – why that’s good news

Reserve Bank Governor Adrian Orr. Photo / Mark Mitchell

Business confidence fell further in May as many firms struggle to see the light at the end of the tunnel, according to ANZ’s latest Business Outlook survey.

But better news might be closer than some think.

ANZ chief economist Sharon Zollner said while May’s survey makes for grim reading, it was encouraging for the Reserve Bank (RBNZ).

“It’s all part of the RBNZ’s plan,” Zollner said.

“We’re optimistic that they’ll be able to cut the Official Cash Rate [OCR] earlier than they expect as slowing domestic demand continues to weigh on CPI inflation pressures.”

Business confidence fell four points to +11 in May. It follows falls of eight points in April, 12 points in March and two points in February.

Meanwhile, expected own activity fell two points to +12, and past own activity lifted two points to -18.

“The manufacturing sector was, surprisingly, much chirpier this month, but the services sector is now feeling the chill as the economic slowdown broadens,” Zollner said.

“Reported past activity, which has the best correlation to GDP, remains weak at -18 per cent. This indicator suggests positive GDP growth in Q1, but Q2 is looking nothing flash at this point with two months of data in.”

Zollner said there was a welcome easing in inflation indicators.

Pricing intentions fell five points to 42 while inflation expectations eased from 3.8 per cent to 3.6 per cent.

“Also encouraging for the RBNZ, there was finally a fresh low in the net proportion of firms intending to raise their prices in the next three months,” she said.

“There’s still a long way to go, but any step in the right direction is welcome.”

However, the proportion of firms expecting higher costs remains stubbornly high, she said.

Cost expectations eased back to 72.6, from 76.7 in April. This is the lowest mark since February 2021.

“The magnitude of expected cost increases also eased back to 3 per cent,” Zollner said.

ANZ chief economist Sharon Zollner.

Wage increases versus a year earlier fell from 4.0 per cent to 3.4 per cent, and are weakest for retail.

Expectations for wages over the next 12 months fell from 3.0 per cent to 2.8 per cent.

“Wage increases of that size have historically been consistent with CPI inflation at target. This data matters given the RBNZ’s pointed comments about firms’ wage and price-setting decisions last week,” Zollner said.

Last week, the RBNZ left its forecast for OCR cuts largely unchanged in what has been received as a hawkish monetary policy statement.

In keeping the OCR on hold at 5.5 per cent, the RBNZ said monetary policy would need to stay “restrictive for longer than anticipated in the February meeting, to ensure the inflation target is met”.

The RBNZ said it sees inflation returning to its 1 to 3 per cent target range by the end of 2024.

“More meaningful progress on getting non-tradable inflation down is in the pipeline, which barring any nasty inflationary surprises should in time restore the quiet confidence the RBNZ was previously exuding that they’ve got this, allowing rates to fall,” Zollner said.

“But for now, many firms are struggling to see the light at the end of the tunnel.”

Westpac senior economist Michael Gordon said the May Business Outlook survey signalled that the New Zealand economy remains in a soft patch.

“Today’s survey supports our expectations for soft activity through the middle part of this year, with inflation pressures easing gradually but remaining above normal for a while yet,” Gordon said.

Cameron Smith is an Auckland-based journalist with the Herald business team. He joined the Herald in 2015 and has covered business and sports.