Business confidence in New Zealand has surged to its highest level since March 2015, according to the latest ANZ Business Outlook survey. The survey, which was conducted in November 2023, showed that a net 31 percent of respondents expected the overall economy to improve over the next 12 months, up from a net 23 percent in October. The expected own activity outlook also rose to a net 26 percent, the highest since December 2019.
Post-election optimism boosts business sentiment
One of the main factors behind the rise in business confidence was the post-election optimism that followed the formation of the new government led by Prime Minister Jacinda Ardern. The survey found that for much of the sample, this was their first survey response since the election, and that the change in government had a positive impact on their outlook.
The survey also noted that the new government had announced some policy changes that could benefit the business sector, such as the extension of the wage subsidy scheme, the increase in the minimum wage, and the introduction of a new tax bracket for high-income earners. These measures could help to support consumer spending, reduce income inequality, and generate more tax revenue for the government.
Economic recovery continues despite challenges
Another factor that contributed to the improvement in business confidence was the ongoing economic recovery from the Covid-19 pandemic. The survey showed that the economy had bounced back from the sharp contraction in the second quarter of 2023, when the country went into a strict lockdown to contain the virus outbreak. The survey indicated that the activity indicators had recovered to pre-pandemic levels, with strong growth in retail, services, and construction sectors.
However, the survey also highlighted some challenges that the economy faced, such as the persistent inflation pressures, the labour shortages, the supply chain disruptions, and the uncertain global environment. The survey reported that the inflation indicators were at record highs, with a net 96 percent of firms expecting higher costs and a net 81 percent intending to raise prices. The survey also found that a net 64 percent of firms reported difficulty finding skilled staff, and a net 74 percent reported difficulty finding unskilled staff. The survey also noted that the export intentions had fallen slightly, reflecting the weaker demand from some of the key trading partners, such as Australia and China.
Implications for monetary policy
The survey suggested that the Reserve Bank of New Zealand (RBNZ) would face a difficult balancing act between supporting the economic recovery and containing the inflation pressures. The survey showed that the inflation expectations had risen to 5.5 percent, well above the RBNZ’s target range of 1 to 3 percent. The survey also showed that the interest rate expectations had increased, with a net 55 percent of firms expecting higher interest rates in the next 12 months.
The survey implied that the RBNZ would need to tighten its monetary policy sooner rather than later, to prevent inflation from becoming entrenched and eroding the purchasing power of consumers and businesses. The survey also suggested that the RBNZ would need to communicate its policy intentions clearly and credibly, to anchor the inflation expectations and maintain the confidence in the monetary system.
