Middle East ceasefire lifts sentiment, but cost pressures and rate rises remain real threats
The May business confidence data lands in a market already braced for higher rates.
The ease of credit index remains negative at -17.1, and rising interest rates have been flagged as a concern by survey respondents.
Inflation expectations for the year ahead eased slightly to 3.63% from 3.81% but remain well above the RBNZ's 2% target midpoint — and with the RBNZ widely expected to begin hiking the OCR as early as July, the window for clients to lock in current rates may be narrowing faster than many anticipate.
A partial recovery, not a turning point
New Zealand business confidence has clawed back some ground in May, but the rebound falls well short of pre-conflict levels. The ANZ Business Outlook showed confidence lifting 21 points to a net +10, recovering from April's -10.6 reading. Expected own activity also improved, rising from 19.6 to 25.6.
The partial recovery reflects a cooling in Middle East tensions following a ceasefire in early April, with domestic petrol prices easing from nearly $3.50 per litre in early April to around $3.28 currently, while diesel has pulled back from a peak of nearly $3.60 to around $3.15, according to Westpac senior economist Michael Gordon.
In a Westpac commentary, Gordon noted the rebound was broadly expected but cautioned that sentiment remains substantially below the +59% reading recorded in February, before the Middle East conflict reshaped the economic outlook. The economy appears to be steering clear of the mid-year slump seen in the previous two years — a mildly positive signal for borrower activity.
Cost pressures and a split economy
Beneath the headline, the cost and employment data tells a different story — and one directly relevant to how brokers assess borrower resilience.
A net 90.4% of firms expect their costs to rise over the next three months, unchanged from April and well above pre-conflict levels. Agriculture hit 100% on cost expectations, while retail and construction are now both reporting falls in activity compared with a year earlier. The gap between expected costs and expected prices remains wide, implying sustained margin pressure across the economy.
The share of firms reporting higher employment compared with a year earlier fell sharply, from a positive 3 to -5.2. Construction and retail are reporting the sharpest workforce contraction, while manufacturing remains the standout positive with employment intentions at +3.4, recovering from -2.7 in April.
The ANZ report flagged an important nuance for the RBNZ's inflation assessment: wage intentions were little changed and remain close to cyclical lows.
"It's early days, of course, but there are currently no signs of the price shock morphing into core inflation pressures," said Sharon Zollner (pictured), ANZ chief economist — though wage indicators have only returned to the RBNZ's February baseline rather than signalling any downside surprise.
With clients facing higher mortgage rates ahead, that assessment will be closely watched in the months ahead.
Access the full ANZ Business Outlook here.
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