ANZ chief economist says perhaps reality is biting for businesses as it becomes clear falling interest rates will take time to 'work their magic'

The ANZ's latest Business Outlook survey is showing falling confidence levels and some "lingering inflation challenges under the surface".

The January survey shows that business confidence fell 8 points to +54 in January, while expected own activity eased 4 points to +46 - though ANZ notes both are still very high. Past own activity (the best GDP indicator) was stable.

The survey showed that pricing and cost indicators lifted, with the downward trends that have been in place over the past year showing signs of flattening off. Inflation expectations lifted a touch but remain within the target band.

"It was a slightly less encouraging start to the New Year for businesses," ANZ chief economist Sharon Zollner said.

"Perhaps reality biting as it becomes clear that falling interest rates over the second half of last year will take time to work their magic. That’s not surprising, and the level of confidence and activity expectations remains very healthy, despite the pullback to start the year."

Zollner said a modest pullback across headline confidence and some activity indicators certainly doesn’t suggest the recovery in the economic activity has stalled, but firms may be reassessing how long they might have to wait to get back to a new ‘normal’.

"Insofar as the slowdown was primarily caused by higher interest rates, lower interest rates should be an effective cure, but it will take time," Zollner said.

"Meanwhile, another month of increases across pricing intentions and cost expectations highlights some lingering inflation challenges under the surface. The softer NZD [NZ dollar] may well be a factor here."

Zollner said it was reassuring that the December quarter inflation figures released earlier this month showed underlying domestic disinflation is intact, and in fact is easing a little faster than the RBNZ had anticipated in its November Monetary Policy Statement.

"Nonetheless, firms continue to report an environment of high costs," she said.

"While demand is recovering, the potential for supply-side constraints to still be lurking is one of the reasons the RBNZ is likely to become more cautious in reducing the OCR [Official Cash Rate] as it gets closer to a neutral policy setting."

Zollner said the survey results certainly don't stand in the way of the RBNZ delivering another 50 basis-point cut to the OCR at its next review on February 19.

However...

"...It does highlight some of the uncertainties on the horizon further into 2025 regarding just how much growth the economy might be able to deliver before inflation pressures re-emerge," Zollner said.

"For now, however, still subdued demand conditions appear to be stifling firms’ intentions to raise prices."