Business confidence rebounded sharply in the June but inflation pressures are building with labour shortages now the worst ever recorded in the NZEIR Quarterly Survey of Business Opinion (QSBO).

The long-running survey, conducted by the NZ Institute of Economic Research, found a net 10 per cent of businesses now expect an improvement in the economic outlook – a turnaround from the net 8 per cent of businesses who had expected a deterioration in the previous quarter.

It also pointed to rising costs and building inflation pressure.

That’s prompted ASB economists to move their forecast for Official Cash Rate hikes forward to November this year.

“The inflation and demand gauges in the NZIER’s Quarterly Survey of Business Opinion are so strong that it is increasingly clear that the RBNZ cannot afford to wait much longer before starting to reduce the amount of monetary stimulus currently in place,” said ASB chief economist Nick Tuffley.

ASB is the first of the big four banks to bring its rate-hike forecast forward.

Westpac senior markets strategist Imre Speizer said the QSBO report and the ASB’s rate forecast drove the New Zealand dollar up by almost half a US cent to US70.60c.

A rate hike in February had already been fully priced in by markets. The Reserve Bank’s current rate track points to hikes beginning in the middle of next year.

However, this may change at the next Monetary Policy Review later this month.

The QSBO showed firms’ own trading activity also picked up strongly, with a net 26 per cent of businesses reporting increased demand in the June quarter.

“These results suggest the recovery in the New Zealand economy will remain robust over the coming year,” said NZIER principal economist Christina Leung.

But inflation pressures were building, with businesses reporting costs rising strongly, partly because of the difficulty in sourcing inventory, she said.

Despite that, firms were still looking to expand further through both hiring and investment.

“In particular, a net 15 per cent of firms increased headcount in the June quarter, while a net 20 per cent of firms are looking to increase investment in plant and machinery over the coming year,” she said.

“This increased focus on investment in plant and machinery likely reflects the labour shortages that firms are facing, which is encouraging firms to consider the use of labour-saving technology”

That will be seen as good news by policy makers hoping that the squeeze on labour can raise business investment levels and boost productivity.

The scarcity of skilled and unskilled labour was at the most acute on record over the history of the survey.

“All up, these results reinforce our expectation that rate hikes are on the horizon,” said ANZ economist Finn Robinson.

“We’ve pencilled in February 2022, but risks are pointing towards sooner rather than later. The economy is booming, and while there’s still some softness in the tourism industry due to the border closure, the sheer strength in demand elsewhere is swamping this effect.”

Source: Read Full Article