ANZ still picking interest rate cut as October business confidence stays sour

Wednesday 31st October 2018

New Zealand business confidence remained sour in October with both headline sentiment and firms' views of their own activity largely unchanged from September, with the ANZ Bank still thinking the Reserve Bank will eventually face pressure to cut interest rates.

A net 37.1 percent of 367 firms surveyed in the ANZ business outlook survey for October expect general business conditions to deteriorate in the coming 12 months versus a net 38.3 percent that saw a deterioration in September. Agriculture is the most downbeat sector, followed by retail.

However, firms’ views of their own activity, which is more strongly correlated with actual economic performance, remained positive, with a net 7.4 percent predicting increased activity versus 7.8 percent in September and the strongest intention to raise prices since 2014.

Tumbling business and consumer confidence has been a political football during the past year, prompting the Labour-led coalition to launch a PR offensive, appoint a Prime Minister's Business Advisory Group, and to attack the credibility of the monthly ANZ confidence monitor.

“It’s clear that business sentiment is not a tail-wind for the economy at present, but we remain optimistic that the boost being provided by a strong labour market, still-high commodity prices, a fiscal boost and now a significantly lower New Zealand dollar will keep things ticking along,” said ANZ Bank New Zealand chief economist Sharon Zollner.

However, merely "ticking along" won't be enough for the Reserve Bank to get inflation sustainably back up to the target 2 percent annual rate, she said.

"We continue to believe that while the impacts of higher wage growth, higher oil prices, and the weaker currency certainly mean there’s no hurry, it remains the case that an eventual official cash rate cut is more likely than a hike," she said.

Other bank economists, particularly the Bank of New Zealand, have shifted to expecting rate hikes rather than cuts since the June quarter inflation figures came in stronger than anticipated.

The ANZ's October survey found that a net 32.2 percent of firms intend to raise prices, versus 30.2 percent in September. This was the highest level since early 2014 and likely reflects rising costs such as wages, transport, and imported goods, she said.

Inflation expectations lifted slightly to 2.22 percent versus 2.12 in the prior month.

Meanwhile, a net 3.3 percent of firms expect to reduce investment in the year ahead, an improvement on the net 9.2 percent tipping a reduction in the prior survey.

Today's survey showed employment intentions improved slightly with a net 0.3 percent planning to cut headcount versus a net 1.3 percent in September.

Profit expectations, however, were a net negative 15 percent versus negative 13.4 percent expecting lower profits when surveyed in September.

Construction intentions also dropped sharply, with residential construction intentions at positive 4.5 percent versus 24.1 percent in the prior survey while commercial construction fell to a negative 23.8 percent from a negative 4 percent in the prior survey.

(BusinessDesk)

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