NZIER’s quarterly survey of business opinion shows RBNZ winning inflation battle and causing recession

NZIER’s quarterly survey of business opinion is welcome news for the Reserve Bank of NZ’s fight against inflation, economists say. 

BNZ head of research, Stephen Toplis said it was “probably an overstatement” to say RBNZ would be “overjoyed” with the results of Tuesday’s Quarterly Survey of Business Opinion (QSBO).

“But there is no doubt it will be mighty relieved that the labour market and inflationary pressures are clearly moving in the ‘right’ direction in terms of its objectives”. 

The key message from the survey was that labour market concerns had begun to diminish as more workers were entering the country and demand for products had eased. 

For the first time since June 2021, businesses have reported demand as being the primary limit to output and not labour shortages. 

The story for much of the past two years has been that businesses have been unable to hire enough staff to meet high consumer demand. This has been a key driver of inflation. 

Now firms are reporting less difficulty in finding both skilled and unskilled labour, despite record high turnover and strong hiring intentions.

Toplis said the central bank would look closely at these measures as it assesses whether the economy was moving towards maximum sustainable employment. 

“We think the Reserve Bank will, generally, be cautiously optimistic about the message the suite of labour market indicators is delivering and it should also be heartened that the net number of businesses intending to raise prices has fallen from 71 to 61.” 

That reading would be consistent with annual inflation falling to roughly 6%, as BNZ has forecast for the 12-month ending in September, and lower over the following year. 

The data wasn’t soft enough for the central bank to back away from a rate hike tomorrow, but it does support the view that the official cash rate doesn’t need to go all the way to 5.5%. 

NZIER’s survey showed a net 61% of firms expect to increase prices in the next three months, that number would need to fall to around 25% to be consistent with the Reserve Bank’s definition of price stability.

“None of this stuff says the RBNZ has won the battle, yet. But it definitely suggests it is not losing,” Toplis said in a note.

“Today’s data almost certainly will leave it feeling less threatened that inflation might remain at its current elevated levels.”

Pick’n’mix 

Kiwibank economists, Jarrod Kerr and Mary Jo Vergara said the survey results were “a bit of mixed bag” with good and bad data points to point to. 

“Demand is falling, investment intentions are weak, and inflation remains a problem. Fewer firms reported higher costs in the March quarter, that’s good news. But more firms raised their prices in Q1, not so good”. 

“Business confidence improved, but not hugely. Cost pressures have eased, but consumer prices are still rising. Labour shortages may be normalising, but sales are now the top concern”.

The economists said they still believed the RBNZ might tighten monetary policy more than necessary but this survey was unlikely to change its trajectory. 

Mark Smith, a senior economist at ASB Bank, said pricing and cost metrics had moved lower but remained too high to be consistent with inflation under 3%. 

“At long last, there are signs that the weak demand backdrop is starting to make headway into easing capacity pressures, although there is still a long way to go”.

RBNZ would continue raising rates until it was “supremely confident inflation will settle” and reduced pressure in the labour market was just one promising sign. 

Meanwhile, New Zealand has likely entered a recession during the past three months and the survey suggests there may be more difficult months ahead for businesses and workers.  

“The signal, nonetheless, is consistent with recessionary conditions, although confidence gauges have not always provided a useful economic signal of late,” he said.  

Christina Leung, NZIER’s principal economist, agreed that gross domestic product had declined slightly in the first three months of the year. 

“We believe that with the destruction from the extreme weather events, that would result in a negative quarter,” she said. 

This would put the New Zealand economy in a technical recession, which is defined as two consecutive quarters of negative growth. 

Trouble on site

BNZ’s research team called attention to the rapid deterioration of conditions in the building sector, in the survey. It was the most downbeat sector with a net 76% of firms expecting a worsening in conditions over the coming months. 

“This is particularly important because the wider economy tends to be highly leveraged to this sector. It is thus with some trepidation that we note that new orders expected by builders are at a low not seen since the almighty recession of 1991.”

Another notable data point was that 64% of builders saying that a lack of demand is the key reason constraining output. Previous surveys had shown a lack of materials as the top issue, but it has “faded into insignificance”.