Economists are warning the Reserve Bank is running the risk of undershooting its 2% inflation target after seeing weak pricing data in the Quarterly Survey of Business Opinion (QSBO).
While business confidence has bloomed in ANZ’s monthly survey and the NZ Institute of Economic Research’s QSBO, it has done so from a low base and on the hope of rate cuts.
Actual data showed most firms had a difficult third quarter and many were expecting another tough three months ahead. A net 32% reported lower trading activity in September, and a net 2% expect the final quarter of 2025 to be even worse.
A net 41% of firms experienced cost increases, but only 3% were able to pass them on. This made them less profitable and pushed roughly a third of them to lay off staff.
ANZ’s business survey made headlines on Monday as confidence levels shot up to a 10-year high causing concern the Reserve Bank could be discouraged from further rate cuts.
But that survey asks about conditions one year ahead, while the QSBO focuses only on the current and previous quarters — both of which still look weak.
Stephen Toplis, the head of market research at BNZ, said the results looked so weak that central bank policy makers were at risk of pushing inflation well below its target.
His team had already forecast inflation being at 1.7% at the end of next year, and that risk has increased after a net 22% of merchants reported lowering selling prices in September.
“Only twice in the history of this series, dating back to the 1960s, have weaker results been posted,” Toplis said.
“A mere net 7% of respondents now intend to raise selling prices … we think a reading of this magnitude is consistent with annual CPI inflation falling [below] 1%.”
Crash landing
The survey provided evidence the economy will recover, as interest rates fall, but it will be some time before the excess capacity gets used up and inflation pressure is generated.
After years of missing its inflation mandate on the upside, policymakers at the Reserve Bank will desperately need to encourage growth to avoid failing again on the downside.
“While we are now touting a 50 point move we accept that this is a bold call and that a conservative central bank could easily baulk at an acceleration,” Toplis said.
Most economists were predicting a 25 basis point reduction at the October meeting, which would bring the Official Cash Rate to 5%, but bond traders were leaning toward 50 points.
Mark Smith, an economist at ASB, said he wouldn’t rule out a 50 basis point cut as the economy was still struggling and looser policy was “desperately needed”.
The results of the QSBO would have had the Reserve Bank concerned inflation could drop below the 2% target soon and possibly settle there in the medium term, he said.
Others, such as ANZ’s Miles Workman, thought the dramatic rebound in confidence was a reminder that monetary policy works in both directions.
“Provided capacity indicators remain in disinflationary territory long enough to prevent disinflation progress from stalling at too high a level, the Reserve Bank should feel comfortable proceeding cautiously along the path laid out in the August Monetary Policy Statement”.
Both ANZ and NZIER thought the Reserve Bank would most likely deliver a 25 basis point cut at its meeting next week, having already got one in the bag from August.
Are we out of the woods yet?
In addition to the two surveys, the Treasury also met with businesses and other organisations during September as part of its preparation for its next economic and fiscal update, scheduled for December.
It wrote in its fortnightly update that “the general feeling” among firms was that the economy was “at or near” the bottom of the economic cycle.
“Firms were expecting demand and activity over the remainder of 2024 to be soft but anticipated a pickup in 2025, as falling interest rates stimulate household spending and business investment,” analysts wrote.
The retail and hospitality sectors were particularly pessimistic, with some firms reporting weaker activity than during the Global Financial Crisis.
Residential construction companies had received an uptick in business enquiries since the Reserve Bank cut interest rates but it hadn’t yet translated into sales.
“Firms thought further cuts were needed to provide developers and households with the confidence to ‘pull the trigger’ on new residential property.”
Inflation pressures were generally easing but pockets of pricing pressure persisted. Some examples were shipping costs, insurance, electricity, and rates.
Treasury said one of the key takeaways was that businesses thought economic conditions were currently soft but expected to improve.
Kiwibank economists agreed but warned the lift in business confidence was underpinned by the expectation of more rate cuts.
“The outlook has improved but the here-and-now demands more rate relief from the Reserve Bank, and quick, in order to stave off further unnecessary weakness in the Kiwi economy and labour market.”
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