The first reading from the ANZ’s Business Outlook survey for 2021 contains good news and not-so-good news.
Business confidence is up again, the preliminary results from the February survey show – as are business activity levels.
But costs are up too – and this is dampening profitability.
ANZ chief economist Sharon Zollner notes that the Reserve Bank has taken the line for a few years now that too much inflation would be a quality problem, after years of undershooting its 1% to 3% target.
“At the rate things are going, they might just get what they wish for,” she said. She does still believe however, a lot of the current inflationary pressures are likely temporary and will “unwind”.
In terms of the key results so far from the February survey, Zollner said the ‘headline’ business confidence measure lifted 3 points to +12% while the activity outlook inched over +22%.
“We are forecasting a wobble in demand in the first few months of this year as the true cost of the closed border for the tourism industry starts to become apparent,” she said.
“But its fair to say theres not much sign of it yet, with the roaring housing and construction sectors filling the void, albeit fuelled by credit rather than foreign exchange earnings.”
ASB senior economist Jane Turner said it was the “unprecedented” surge in cost and pricing intentions that stole the show in this months survey.
“The lift follows numerous anecdotes of supply shortages and shipping delays late last year.
“This has confirmed the widespread nature of cost pressures (with net 71% of businesses reporting an increase in costs) which is expected to lead to strong price increases.
“The ANZs survey of pricing intentions is consistent with inflation quickly rising back up towards the top-half of the RBNZs 1-3% target band.
“The concern about deflation risks are now well behind us.
“What is unclear at this stage is if the current cost pressure is a short-term phenomenon or start of a longer-term trend. With the assumption the disruption to supply chains and shipping capacity is resolved over the course of this year, the RBNZ will likely look through short-term cost-driven spikes in inflation,” Turner said.
ANZ’s Zollner said some of the particular strong details in the survey included:
- Investment intentions up 9 points.
- Employment intentions up 2 points.
- Capacity utilisation up 7 points all are sitting well above where they ranged in 2019, pre-Covid.
- Inflation expectations lifted too, from 1.65% to 1.78%, another step closer to the 2% RBNZ CPI target midpoint.
- Expected costs rose 14 points.
“Its quite telling that a net 71% of firms expect higher costs ahead,” Zollner said.
“Firms are intending to pass the costs on where they can, with a net 49% of firms intending to raise their prices.
“But thats a lot fewer firms than are experiencing higher costs, no doubt going a long way to explaining why expected profits dropped 6 points, with roughly an equal proportion of firms expecting higher vs lower profitability ahead.
“Further monetary stimulus is looking less necessary by the week, and we no longer expect any more [Official Cash Rate] cuts this cycle.
The RBNZ has taken the line for a few years now that too much inflation would be a quality problem, after years of undershooting the target. At the rate things are going, they might just get what they wish for.
But a lot of it is likely due to temporary factors and can be expected to unwind.
“There should be some awesome Boxing Day sales once all that Christmas retail stock finally arrives,” Zollner said.