Key Points- Headline business confidence held steady with a net 18% of firms expecting the NZ economy to improve over the coming six months.
- Firms’ outlook for their own domestic trading activity (DTA) eased a touch, with a net 23% of firms expecting their own business to improve.
- The mix of sectors feeling upbeat about the outlook has shifted, with the services sector the most confident, while building firms were feeling less optimistic about the general economic outlook.
- Firms are starting to follow through on intentions to lift prices more convincingly, which (if continued) will feed through to greater inflation pressure.
- Today’s survey has little impact on the outlook for monetary policy. Indicators suggest that inflation will increase gradually and we continue to expect the RBNZ will leave the OCR on hold until late 2018.
Summary
The NZIER Quarterly Survey of Business Opinion (QSBO) released this morning showed that confidence in the NZ economy remained unchanged, with a net 18% of firms expecting the economic outlook to improve. This remains above long-run levels of confidence, although we saw a compositional shift in confidence across different industries. Looking at firms’ expectations for their own activity, a net 23% of businesses expect their activity to pick up over coming months – down marginally from a net 25% in March.
At these levels, confidence remains robust and indicative of decent growth over the year ahead. While the own activity indicators from today's QSBO survey and ANZ's latest Business Confidence survey both suggest that growth should increase to around 4% yoy over 2017, there has been a widening gap between actual GDP out-turns and firms’ own trading indicators (see chart) and we expect more modest GDP growth of around 3% over the rest of 2017.
While capacity pressures have eased slightly, intentions to lift prices (and subsequent follow-through) have picked up since the start of the year. In addition, we are looking at significant skilled labour shortages, which suggest increasing wage pressure in the labour market. Overall there continue to be signs that domestic inflation pressure is building, but this is a much more gradual process than in previous cycles - giving the RBNZ plenty of time to sit on its hands for now. We maintain our view that the RBNZ will leave the OCR on hold at 1.75% until toward the end of 2018.
Confidence mix shifts across sectors
While headline confidence in the NZ economic outlook was unchanged, the outlook for different sectors shifted. The building industry is less upbeat, with a net 18% of firms expecting the NZ economy to improve – down from 31% in March. Services firms were the most confident about the outlook, and we also saw a strong pick up in confidence from manufacturers, despite weaker output over the last three months. Unlike the ANZ Business Confidence measure, the QSBO doesn’t directly survey the agricultural sector (which has experienced a strong increase in confidence) but this is likely to indirectly be picked up though improved sentiment through some of the manufacturing and services firms.
While the building industry’s confidence in the general economy has waned, activity indicators for the sector were more positive. Over the June quarter, 38% of firms said they experienced an increase in new orders – the highest since the mid-1990s –suggesting a rebound after a weak start to 2017. While builders’ expectations for the September quarter were slightly softer than we have seen in recent releases, architects are reporting a very strong pipeline of work over the next couple of years. Architects’ expectations for work picked up to the strongest level since September last year – particularly for housing and commercial work. This result is encouraging as there has been some concern about slowing trend growth in building consents data and the soft print for building work at the start of this year.
Price pressures somewhat mixed but still point to a gradual increase in domestic inflation
While confidence has remained solid, firms reported an easing in capacity constraints over the last quarter. Capacity utilisation has pulled back to 92.1%, after hitting a record high of from 93.6% in March. This was mainly driven by a decrease in reported capacity utilisation from manufacturing and building firms – although both remain above long run averages. While capacity pressures used to have a solid correlation with domestic inflation, that relationship appears to have broken down (see chart) in recent years. Recently, a better indicator for domestic inflation pressure has been the expected selling prices measure in the QSBO survey.
While expected pricing intentions pulled back slightly to a net 24% of firms expecting to lift selling prices over the next three months (down from 29% in March), they indicate rising domestic (non-tradable) inflation pressure in NZ in the coming quarter (see chart ). We continue to expect domestic inflation to gradually increase in the year ahead to a point where the RBNZ will feel comfortable starting to lift the OCR from the end of 2018. Given the increased volatility we expect to see in tradables inflation in coming quarters (in response to a decline in oil prices and the elevated NZ TWI), domestic inflation and underlying core inflation measures will continue to be the dominant focus for the RBNZ. Neither of these measures are expected to increase with any speed, but they are trending in the right direction at least.
Hiring intentions steady but tricky finding skilled workers
Firms hiring intentions have increased slightly over the last quarter, with a net 12% expecting to hire in the next three months. This remains down from very strong intentions that we saw in the second half of 2016. However, it appears that firms are increasingly struggling to find the right staff. While hiring has been particularly strong in the building sector in recent months – with a net 34% of construction firms hiring staff, almost 30% saying lack of labour is a constraint on increasing their business output. Across all sectors surveyed, labour reported as a constraint on business is at the highest level since pre-GFC. That ties in with the QSBO’s measure of skilled labour shortages, with a net 47% of firms reporting it is difficult to find skilled labour.
Despite an increasing lack of skilled staff, wage growth in NZ has been rather lacklustre. We suspect that low headline inflation rates have played a part in this – most firms use CPI inflation as a benchmark for pay increases - given inflation was below 1% for several years up until the end of 2016. With stronger headline inflation and signs of further tightening in the labour market, we expect wage growth to gradually pick up over the next few years and also add to inflation pressure in NZ.
Market reaction
The QSBO doesn’t tend to generate a significant market moves and we saw a muted initial reaction in both foreign exchange and interest rate markets. Over the last week, local interest rates have instead been pressured higher by more upbeat rhetoric from global central banks, sending international yield curves higher and prompting local rates to follow suit. Over the course of today we have seen the data perhaps prompt a little more receive interest in wholesale swap rates, with the 2-year swap rate declining about 5bps to 2.32%. In response to international rate moves we have also seen OIS pricing for OCR hikes from the RBNZ move forward to suggest one 25bps hike by May 2018, from August 2018 a week ago. This is about six months ahead of our call for a rate hike from the RBNZ in November 2018.