Business Confidence Improves in NZ, but Inflation Worries Persist – ANZ Survey

Business confidence in New Zealand improved in January, as firms became more optimistic about the economic outlook and their own activity, according to the latest ANZ Business Outlook survey. The headline confidence index rose 13 points to a net 7% of respondents expecting the economy to improve over the next year, while the own activity index rose 4 points to a net 22% of firms expecting an increase in their own activity.

The survey, which covers 1,200 businesses across various sectors and regions, was conducted between 10 and 24 January, and reflects the easing of Covid-19 restrictions and the reopening of the border with Australia. The survey also shows that most activity indicators improved, such as employment, investment, and export intentions, as well as capacity utilization and profitability expectations.

ANZ chief economist Sharon Zollner said the survey results were encouraging, as they suggested that the economy was recovering from the impact of the Delta outbreak and the lockdowns in the second half of 2022. She said the survey indicated that the economy was on track to grow by around 3% this year, after contracting by 0.4% last year.

Inflation Expectations Remain Elevated

However, the survey also revealed that inflation expectations remained high, despite easing slightly from the previous month. The expected annual inflation rate for the next year fell from 6.1% to 5.9%, while the expected annual inflation rate for the next two years fell from 5.2% to 5.1%. Both figures are well above the Reserve Bank of New Zealand’s (RBNZ) target range of 1% to 3%.

The survey also showed that firms continued to face rising costs and pricing pressures, as supply chain disruptions, labour shortages, and higher commodity prices persisted. A net 82% of firms reported higher costs, while a net 66% of firms planned to raise their prices. Both figures are near record highs.

Zollner said the inflation outlook was still “too high” for comfort, and that the RBNZ would need to keep raising the official cash rate (OCR) to bring inflation back to its target. She said the RBNZ was likely to hike the OCR by 25 basis points to 1.25% at its next meeting on 23 February, and by another 100 basis points over the course of the year, reaching 2.25% by the end of 2023.

Risks and Opportunities Ahead

Zollner said the economy faced several risks and opportunities in the coming months, depending on the evolution of the Covid-19 pandemic, the global economic recovery, and the policy responses. She said the main risks were the emergence of new variants, the slow vaccination rollout, the tightening of monetary and fiscal policies, and the geopolitical tensions. She said the main opportunities were the reopening of the borders, the pent-up demand, the strong commodity prices, and the low interest rates.

Zollner said the survey suggested that businesses were prepared to face the challenges and seize the opportunities ahead, as they showed resilience and adaptability in the face of uncertainty. She said the survey also indicated that businesses were keen to invest and grow, as they identified their top areas for growth as entering new markets, evolving their products and services, and investing in their teams.

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