Latest ANZ Business Outlook Survey records massive hit to business confidence, while inflation and pricing expectations hit fresh survey highs

Business confidence has been "clobbered" by the Omicron outbreak, while inflation and pricing expectations have soared again, according to the latest ANZ Business Outlook survey.

"Inflation expectations, cost expectations, and pricing intentions all hit fresh record highs. Indeed, the latter suggest CPI inflation could hit 8%, rather than the mid-6s the RBNZ and we are currently forecasting," ANZ chief economist Sharon Zollner said.

She said 2022 was shaping up to be a challenging year economically. Getting on top of "super-charged inflation" without an outright recession was looking increasingly difficult.

The February ANZ Business Outlook results showed "widespread anxiety about the impact of Omicron", Zollner said.

Headline business confidence "tanked" 28 points, while own activity fell a more modest 14 points, compared to December, she said.

Notable features in the survey included sentiment in the construction sector - both commercial and residential - turning negative for the first time since mid-2020. Across all industries, profit expectations have plunged. Companies' employment intentions are still in positive territory - but have taken a big hit since the last survey in December. Investment intentions are likewise still in positive territory - but not by much.

“Activity indicators fell across the board. But that has done nothing to ease inflation pressures, which remain extreme," Zollner said.

“Record-high pricing intentions came despite expectations of weaker activity. Recent weakness in the NZD probably hasn’t helped, though every type of cost is going up. It supports our contention that while Omicron will be enormously disruptive, it won’t do anything to ease inflation pressures.

“The survey makes grim reading, certainly. But this isn’t March 2020 and we do have an idea of the storm that we are heading into. Other countries have been through the Omicron wave already, and have seen a sharp bounce-back in spending on the other side.

“The disruption will be intense, but relatively short-lived. But the question of when cost pressure will ease is anyone’s guess, with wages yet to really get going.

“Cash flow pressures on households won’t subside with the Omicron wave. Retailers seem to be aware of that, with the weakest own activity expectations. Retail is the most pessimistic by a country mile, and services are also negative.

“The Omicron wave represents more stress, more cash-flow pressure and more interrupted revenue, and the cumulative damage to some firms’ balance sheets, particularly in hospitality, will likely prove too much.

“The intense stage of Omicron will pass quite quickly. But both before and after this outbreak, firms face skyrocketing costs, extreme labour shortages, and shipping disruptions that continue to worsen.

“On the demand side, households are facing into higher interest rates, falling house prices, and a vicious increase in the cost of living.

“All up, 2022 is shaping up to be a challenging year economically, and getting on top of super-charged inflation without an outright recession is looking increasingly difficult.

“But with CPI inflation heading well over 6% the RBNZ has no choice but keep right on hiking. And now global geopolitical developments threaten yet more imported inflation via energy markets.

“Buckle up.”