ANZ economists say the recent published drop in GDP data 'seems to have given things a decent shunt south' in respect to business confidence

The recently published drop in GDP for the December quarter "seems to have given things a decent shunt south" in respect to business confidence, according to ANZ economists.

The latest (March) ANZ Business Outlook Survey shows that recorded business confidence levels fell 12 points to +23, while the expected own activity measure fell 7 points to +23 and past activity eased 2 points to -7.

"The March ANZ Business Outlook survey showed weakening activity indicators and a slight fall in inflation pressures," ANZ Chief Economist Sharon Zollner said.

She noted that a a strong 'recession headline' impact was evident in the consumer confidence data published by ANZ earlier on Thursday.

"For this [business confidence] survey, 14% of responses came in after the Q4 GDP data was published and a similar pattern is evident: activity indicators were sliding, but the GDP data seems to have given things a decent shunt south," Zollner said.

"Reported past activity, which has the best correlation to GDP, suggests the economy may eke out low but positive growth in Q1. That’s consistent with our current forecast of a modest 0.2% q/q lift. This month it was a mixed bag, with a bounce for retail, agriculture and construction, but falls elsewhere."

Zollner said "smoothing through the monthly volatility" shows that construction is experiencing the largest fall in activity, followed by retail, but the picture for retail appears to be brightening. "That’s an interesting contrast with the sharp fall in consumer confidence this morning".

"Strong population growth likely helps explain the discrepancy – even though consumers are warier, there are now a lot more of them."

Commenting on the survey findings, Westpac senior economist Satish Ranchhod said it’s clear that there is increasing nervousness creeping through the business sector.

"On the activity front, a net 7% of businesses reported that their trading activity has declined over the past year, including particular weakness in the retail, construction and manufacturing sectors. There’s also been a drop-off in the number of businesses who expect trading activity will improve over the coming months. Consistent with that, there’s also been a drop in the number of businesses who are planning to take on more staff or increase their capital spending.

"Overall, today’s survey is in line with our expectations for soft activity and slowing inflation. The key issue to watch going forward is how quickly inflation drops back," Ranchhod said.

Zollner said the economy is broadly following the path laid out for it by the Reserve Bank: "not a path strewn with rose petals, but a hard and rocky path through dangerous lands from which not all will emerge unscathed".

"It was back in November 2022 that the RBNZ admitted that they were going to deliberately engineer a recession, and here we are."

Zollner said, however, that "on the other side of this painful adjustment" lies not only low and stable inflation, but also a more sustainable external balance with the rest of the world.

"We are reliant on not so much the kindness as the self-interest of strangers abroad to fund our lifestyles, and that does put some non-negotiable limits on for how long we can keep living beyond our means.

"And we most certainly did that during the Covid era, as demonstrated by both the current account deficit and the fiscal deficit. Carrying on in that vein was never an option. And the sectors experiencing the biggest busts now are those that had the biggest booms."

The good news, Zollner said,  is that the economy is making solid progress. The current account deficit is narrowing. And inflation is clearly on the way down.

"There are some concerning signs of stickiness in some of the inflation measures in this survey, and despite the marked slowing in the economy there is still a good deal of uncertainty about the inflation outlook. It's certainly too soon to declare victory. But eyes on the prize; we’re getting there."