29 Jul 2021

Business confidence tumbles as inflation surges

4:39 pm on 29 July 2021

Business confidence seems to have had a dose of midwinter blues, with firms turning pessimistic about the broad economic outlook and less optimistic about their own prospects.

ANZ chief economist Sharon Zollner.


ANZ's monthly survey showed a net 4 percent of businesses saying the economy would get worse over the next 12 months, while optimism about their individual outlook fell 6 percentage points to 26 percent.

ANZ chief economist Sharon Zollner said activity seemed to be flattening out but inflation pressures were still growing.

"Inflation expectations at 2.7 percent are the highest since early 2012 and look likely to go out the top of the RBNZ's target range of 1 to 3 percent for the first time since 2011."

She said the lift in inflation was more than just supply chain blockages, and required action by the Reserve Bank (RBNZ) in the form of higher interest rates.

Zollner said that left the RBNZ with an uncomfortable dilemma - raise rates and possibly knock confidence and activity, and perhaps have to reverse them in short order to counter other risks such as an outbreak of Covid, or do nothing and risk inflation getting ingrained and fuelling households taking on more debt.

"While it's unlikely, allowing high inflation to become truly ingrained could potentially result in the RBNZ facing an extremely unappealing trade-off between stabilising activity or stabilising inflation in the next recession, whatever the cause and timing of that," Zollner said.

Economists have generally raised their expectations of a rate rise next month after inflation surged to a near 10-year high in the second quarter.

"One never has the counterfactual in macroeconomics, and uncertainty is rife, but inaction comes with risks too. It's time to start normalising monetary conditions, even if trouble might lie closer ahead than we hope."

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