Kiwibank economists say the Reserve Bank may soften its tone around the outlook, acknowledging the waning strength in forward economic activity indicators

The Reserve Bank (RBNZ) will likely raise the Official Cash Rate by another 50 points to 2.5% next week (Wednesday, July 13) - but may "soften its tone" around the outlook - acknowledging the waning strength in forward economic activity indicators, Kiwibank economists say.

In their weekly First View publication Kiwibank's chief economist Jarrod Kerr, senior economist Jeremy Couchman and economist Mary Jo Vergara, say there are a lot of things weighing on confidence at the moment.

They've titled their weekly outlook: "It's now a crisis of confidence".

"Scarce labour. Scarce materials. Rising rates. Rising cost of living. Falling house prices. There’s lots weighing on confidence," they say.

"Firms’ activity and profitability outlook is looking weaker by the day. And for households, inflation and rising mortgage rates are claiming bigger and bigger chunks of the budget. Given the strong correlation between confidence and economic activity, the outlook for the Kiwi economy is dimming."

They said the latest ANZ business outlook survey was "yet another sobering read".

"For the fourth straight month, business confidence has been on a downtrend. In June, confidence fell to the lowest level since the pandemic began (-63 vs -55.6 in May). Across the board, the activity indicators continued to flash red.

"Compared to a month ago, a greater share of the firms surveyed expect their own activity to deteriorate in the coming months (from a net 4.7% to a net 9.1% expecting a decline). Profitability expectations also weakened and fell to 2008/09 GFC lows (-41.5 vs -31.3 in May).

"Supply-side issues remain at the core of the growing pessimism across firms. Top of the list is the difficulty in finding skilled labour. Cost and wage inflation too are weighing on the profitability outlook. And the ongoing supply chain disruptions are still creating logistical nightmares.

"Given the lack of resources, it’s no surprise to see investment intentions slip into negative territory – the first time since August 2020. A pullback in investment points to weaker economic growth ahead."

They said pricing intentions "remain uncomfortably high", especially across retail. In June, a record 96.1% of retailers expect prices to go up in the coming months. That’s well above the previous high of 89%.

"In aggregate, the suite of inflation indicators – pricing intentions, cost expectations and inflation expectations – may be slightly off their peaks, but they are yet to moderate. The combination of a weak activity outlook and persistent inflation pressures underscores the current state of the Kiwi economy: severely supply-constrained."

On the household side, consumer confidence too is down in the doldrums, the Kiwibank economists say.

"The ANZ-Roy Morgan consumer confidence index plunged 1.8 points to 80.5 in June, just a few points above the record low (77.9). Perceptions about next year’s economic outlook deteriorated and a net 3% expect to be worse off in a year’s time. With rising mortgage rates and reduced credit availability, households are also second-guessing splurging on big-ticket items."

Despite the softening confidence, however, the Kiwibank economists say the RBNZ is "unlikely to veer off course" when it has its next Monetary Policy Review on July 13.

"Reining in inflation is the name of the game," they say.

"Inflation indicators may be plateauing, but they’re plateauing at elevated levels.

"We suspect the RBNZ would want to see these indicators moderate before easing up on their current tightening pace.

"We expect the RBNZ to lift the cash rate through neutral next week, by delivering another 50bp hike to 2.50%. The July meeting would mark the third straight 50bps hike.

"But similar to offshore central banks, the RBNZ may soften its tone around the outlook, acknowledging the waning strength in the forward activity indicators."