The good bits have fallen - but the bad bits have risen.
That might be a quick way of summing up the latest ANZ Business Outlook Survey, which shows a fall in business confidence levels but another sharp rise in inflation expectations for the next 12 months - to a nine-year high.
“Inflation expectations at 2.70% are the highest since early 2012 and look likely to go out the top of the [Reserve Bank] RBNZ’s target range of 1-3% for the first time since 2011, given they were 3.33% in the late-month sample. Pricing intentions also remain extremely high," ANZ chief economist Sharon Zollner says.
She says inflation pressures provide "an excellent reason" to raise interest rates now, despite downside risks.
ANZ economists are expecting the RBNZ will raise the Official Cash Rate from the current 0.25% in its next review on August 18.
Zollner says firms continue to report soaring costs and strong demand, "a very inflationary combination".
"While it’s unlikely, allowing high inflation to become truly ingrained could potentially result in the RBNZ facing an extremely unappealing trade-off between stabilising activity or stabilising inflation in the next recession, whatever the cause and timing of that," Zollner says.
She says expected costs for firms continue to lift, with the biggest increase seen in the services sector, where a net 84% of firms expect higher costs.
"This is still the lowest across the economy, but has caught up fast with goods sectors, underlining that there’s a lot more to this than just shipping costs."
Zollner notes that forecasts and market odds on imminent lifts in the OCR have evolved rapidly in the last two months, with a hike in August now "odds-on".
"But Covid risks remain extreme, as events in Sydney attest, and this stark reminder has seen market pricing for OCR hikes back off somewhat.
“The combination of clear upside for the activity and inflation starting point, but downside risks in the (quite possibly not far off) future, do, on the face of it, present a conundrum for the Reserve Bank.
“If they raise rates now, the odds are indeed uncomfortably high that they’ll end up reversing course before long, either because of abrupt trouble related to COVID or global markets, or else because rate hikes turn out to be very potent in terms of their confidence impacts. But counterintuitively, that doesn’t necessarily mean hikes would have been a mistake."
In terms of the Covid risks. Zollner says it is worth noting that lockdowns, if accompanied by aggressive fiscal income support, are not deflationary; "the past 18 months have shown that".
“At least as importantly, super-stimulatory interest rates are encouraging people to pile on debt and take risks they may well regret when trouble strikes.
"Monetary policy is currently exacerbating, rather than smoothing, the business cycle. And to put it in context – we aren’t even forecasting the OCR to get above neutral over the next two years. But it needs to get off the floor.
“One never has the counterfactual in macroeconomics, and uncertainty is rife, but inaction comes with risks too. It’s time to start normalising monetary conditions, even if trouble might lie closer ahead than we hope.”
Looking at deeper at the survey, in July, 'headline business confidence' eased 3 points, while firms’ own activity fell 6 points to +26%. Other activity indicators generally eased a little.
Turning to the detail, compared to June:
- Business confidence was down 3 points to net -3.8%.
- Firms’ own activity outlook was down 6 points to 26.3%.
- Investment intentions fell 9 points to 17.4%.
- Employment intentions ticked up 1 point to 21.4%.
- Capacity utilisation fell 5 points to 19.2%.
- Inflation pressures continue to lift. Cost expectations rose 2 points to net 88.2%. A net 61.3% of respondents intend to raise their prices, down 2 points. General inflation expectations rose 29bp to 2.70%. In the late-month sample, inflation expectations were 3.33%.
- Profit expectations at 0 were down 6 points on June.
- Export intentions fell 5 points to +7.6%.
- A net 51% of firms expect credit to be harder to get, a deterioration of 11 points.
- Residential construction intentions rose 2 points to 42%. Commercial construction intentions dropped 15 points to net 24%.