Gloomy ANZ business confidence clouds NZ interest rate outlook

Reserve Bank Governor Adrian Orr. Photo / File

ANZ's business confidence survey for June is pointing to a further slowdown in the economy, raising the possibility that the Reserve Bank may at some point choose to cut its official cash rate.

Reserve Bank Governor Adrian Orr is expected to keep the official cash rate (OCR) steady at 1.75 per cent at tomorrow's review, but today's ANZ Business Outlook, which showed confidence levels had sunk back to post-election lows, has added more doubt to the growth outlook and the likely path of interest rates.

ASB economists said there were several potential catalysts for the fall in confidence, including ongoing uncertainty of the policy details of the new government, global trade frictions, and the impact of the Mycoplasma bovis cattle disease.

"We still expect to see some gradual improvement in business confidence over the coming months, reflecting the widespread supports to the New Zealand economy," ASB said.

"However, the longer business confidence remains low, the more questions that will be raised over the economic outlook," it said. "An OCR cut cannot be ruled out if this persists."

The New Zealand dollar fell in response to the survey, based on the lower growth scenario.

ANZ Senior Economist, Liz Kendall said when businesses were asked what they thought about business conditions in the year ahead, a net 39 per cent of businesses were pessimistic.

"Business confidence has been falling since June last year as economic headwinds have strengthened," she said.

ANZ's composite GDP growth indicator combines business expectations and intentions with consumer confidence.

"This remains expansionary - with robust consumer confidence providing support - but suggests the economy may continue gently losing steam over coming months, despite the support coming from fiscal stimulus and high commodity prices."

The New Zealand dollar fell by about 20 pips against the US dollar to US68.28 cents and by about 30 against the Australian dollar to A92.43 on the back of the news.

Imre Speizer, senior market strategist at Westpac, said the pull back in the Kiwi was "absolutely" warranted.

"It (the survey) is high frequency data showing that the economy is slowing," he said. "We have seen this for a while and it continues," he said.

Speizer pointed to the last GDP release which showed the the rate of economic growth slowed a little in the March quiarter, and he expected the next GDP release to reveal more evidence of that.

"None of it is really bad. You would call it a gradual slowdown compared with where we were at a year ago," Speizer said.

Data out last week showed GDP rose 0.5 per cent in the March 2018 quarter, following on from a 0.6 per cent increase in the December quarter, and giving an annual rate of 2.7 per cent.

Independent economist Cameron Bagrie said the ANZ survey data was "starting to look worrying" although seasonal factors may have been at play.

GDP growth was now clearly tracking at around 2 per cent and not 3 per cent, he said.

"Today's survey cements more of the same. In fact, growth is looking lower," he said.

BNZ's head of research, Stephen Toplis, said a number of economists were progressively moving in the direction of an OCR cut.

"But our core view is that we are seeing here is a business response to rising input prices and some confusion about the outlook," he said.

"We are in the worst-of-all-worlds scenario at the moment in terms of the negatives, but once you start to see the fiscal injection coming in from June, things will turn the corner," he said.

Low levels of business confidence have continued to irk the Labour-led government.

Last Sunday, Finance Minister Grant Robertson defended the strength of the New Zealand economy in the face of underwhelming business confidence surveys.

"I think the conditions, the underlying conditions of the economy, the environment we're working in now, has got a lot of opportunity," he told TVNZ's Q+A.

"I think what we're dealing with here is an issue around perception, and, sure, we can improve the ways we communicate, and we need to always work on that," he said.