Confidence Keeps Climbing. Cuts Need To Keep Coming

• The improvement in business confidence continues. Expectations of further RBNZ rate cuts underpins the improved sentiment. However, experienced trading activity remains weak. There’s risk the current recession is extended. The here and now demands further rate relief.
• Given the weak demand environment, capacity pressures are easing. And that’s good news for tackling (homegrown) inflation.
• The economic outlook has improved, so long as the RBNZ keeps cutting. Businesses are more optimistic. But that optimism has yet to translate into activity.

The improvement in business sentiment continues. The NZIER’s quarterly survey of business opinion (QSBO), the best on the street, shows a further lift in business confidence. In the December quarter, a net 9% (seasonally adjusted) now expect economic conditions to improve in the coming months – a starkly different result to the net 4% of firms in the September quarter expecting a deterioration in the economic outlook. It’s the first positive outlook in over three years (since the June 2021 quarter), and the highest reading since 2017. After hitting a series-low at the end of 2022, business confidence has been on a slow road to recovery. There was a brief improvement in confidence following the change in government. But it has been the pivot in monetary policy that has prompted a stronger, seemingly sustained, lift in sentiment. Since the RBNZ commenced the cutting cycle in August last year, business confidence has lifted almost 50pts. The economic outlook is improving, and Kiwi businesses are lifting their heads.

There is light at the end of the tunnel. But it’s still some distance until we’re out of the shadows. According to Kiwi businesses, it is still a challenge to navigate the current economic environment. Experienced activity levels remain subdued, painting ongoing weak demand. Over the December quarter, a net 26% of firms reported a decline in trading activity. There’s risk the current recession is extended. The data points to yet another quarter of the Kiwi economy running backwards. At the very least, below-trend growth remains the near-term outlook.

Expectations of activity however shows promise of a turnaround. A net 9% of firms expect an increase in activity in the next year. The dichotomy between what firms are experiencing and what they expect in terms of activity is clear. That is, businesses are more optimistic. But that optimism has yet to translate into activity.

The retail sector is still feeling upbeat about the economic outlook. A net 5% of retailers expect activity to improve next quarter. Lower interest rates, and thus higher disposable incomes, underpins the sector’s optimism. The same is true for the lift in expectations across the services sector. Indeed, all sectors reported an increase in sentiment. But it was the building sector that was crowned the most upbeat over the December quarter. A net 29% of building sector firms were optimistic about the general economic outlook – a whiplash-type change from this time last year when over half of the sector was feeling downbeat about the outlook. Another common thread across the sectors surveyed is that profitability remains under pressure. A net 36% of firms experienced declining profits in the quarter. A weak demand environment continues to hamper the ability of many firms to raise their prices.

Importantly, today’s report confirmed the continued easing in inflation pressures. Fewer firms reported higher costs over the quarter, and the share of firms that raised their prices also remains historically low. The weak demand environment continues to reduce capacity pressures. And that’s good news for tackling (homegrown) inflation. More firms are reporting the ease in finding labour. And now, the lack of sales is the main constraint on business.

The outlook has improved. But the here and now demands further rate relief from the RBNZ. We continue to expect a 50bp cut from the RBNZ in February. The lift in business confidence is underpinned by the expectation of more rate cuts. The RBNZ must deliver.

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