ANZ's latest Business Outlook Survey shows a big lift in confidence and overall sentiment, while cost and inflation expectations have dropped

Is the "worst" over?

ANZ's latest monthly Business Outlook Survey has shown a marked improvement in overall business sentiments, while cost and inflation expectations have dropped. 

ANZ chief economist Sharon Zollner said business confidence leapt 13 points in June, the highest read since November 2021. Expected own activity jumped 8 points; "hardly strong, but the first time in 14 months that it’s been in the black".

"June saw activity indicators lift in a reasonably broad-based fashion. While the levels of many are still subdued, firms appear to be cautiously optimistic that the worst may be over."

Zollner said headline inflation and pricing indicators continue to slowly ease. Inflation expectations have the steepest downward trend, "but are still extremely elevated". The fall in the net proportion of firms expecting higher costs was "particularly marked" this month.

"Firms’ views of their own selling prices in three months’ time were slightly lower versus last month at 2.8%.

“Encouragingly, a general downtrend continues to be evident in firms’ expected costs in three months’ time relative to today. The data imply that on average, firms continue to expect margin compression, given costs are expected to lift more than prices."

Zollner said wage growth was a key driver of the persistence of non-tradables inflation. She said in the latest survey reported past wage settlements ticked slightly lower and expectations of wage settlements for the next 12 months "continued to trend lower in a broad-based fashion".

“Overall, firms are anticipating they will raise wages by considerably less in the next 12 months than they did in the last."

In the latest survey, respondents were asked what their firm's biggest problem was. This is something that the survey asks every three months.

Finding skilled labour continues to be the largest "issue" for firms, but it is now "not the extreme outlier it was a year ago". Problems related directly to inflation – wage and non-wage costs – continue to rate highly. Interest rates have increased as a concern. Low turnover remains well down the list. 

"Times remain very uncertain for businesses, and pressure on profitability from high costs and in some cases, lower turnover, persists. But there are positives too – firms appear to have taken heart from the RBNZ calling a halt to hikes," Zollner said.

"Increasingly widespread expectations that the housing market has found a floor appear to be offering glimmers of hope for the residential construction sector, and finding labour has clearly become much easier as workers have poured in through the border, alleviating a significant source of stress for businesses.

"Of course, capping any upside is the fact the RBNZ is wanting to see subdued demand for a period.

"But for now, cautious optimism appears to be emerging that the worst could be past – but it's conditional on those inflation indicators continuing to fall”.