Pricing and cost metrics remain too high to be consistent with sub-3% inflation, economist says
NZIER’s latest Quarterly Survey of Business Opinion showed a slight improvement in still-weak business sentiment, but activity metrics remained becalmed at recessionary levels, according to a new ASB report.
According to the Q1 QSBO survey, firms’ general business confidence modestly improved, with a net 61% of firms pessimistic over the NZ economic outlook, down from 73% in the previous quarter.
The survey showed that labour market pressures had begun to minimise due to weaker demand conditions and stronger supply of labour – a promising sign that the labour market and inflationary pressures were moving in the right direction in terms of the Reserve Bank’s objectives.
In an Economic Note, Mark Smith (pictured above), ASB senior economist, said pricing and cost metrics edged lower but remained too high to be consistent with sub-3% inflation.
“At long last, there are signs that the weak demand backdrop is starting to make headway into easing capacity pressures, although there is still a long way to go,” Smith said.
NZIER’s survey showed that a net 69% of firms increased selling prices over Q4 (+67% Q4), but expected prices eased to +61% (from 67% in Q4) – the lowest level since mid-2021. Cost metrics, meanwhile, (experienced 63%, expected 69%) dropped to their lowest level in more than a year, but the period of soft demand has compressed already-stretched profitability (experienced -52%, expected -43%).
“Despite recent improvement, firms remain guarded over the direction of the NZ economy and have scaled back their operations, and investment plans,” Smith said. “Recession still looms for 2023. The economic outlook looks dire, but there has been a tendency of late for business and consumer sentiment measures to provide a glass-half-empty view of the outlook.”
Despite the NZ economy most likely to be in recession, the central bank remained focused on bringing inflation back to generally acceptable levels. But while it appears that peak CPI inflation has already been reached, the slow pace at which pricing intentions have cooled suggests it’s still too early for RBNZ to declare victory on inflation.
Smith said ASB expects another 25bp OCR hike today to 5% and a 5.25% OCR peak by May.
“Increased capacity in the labour market is the necessary precondition to pushing underlying inflation lower on a sustained basis,” he said. “Reducing pressures on labour market capacity evident in today’s report was a promising sign. The speed at which labour market capacity opens up will have a bearing for how soon OCR settings can be relaxed. For now, we are sticking to a May 2024 timeframe. OCR cuts are pencilled in from May next year, but the timing depends on how quickly additional capacity emerges in the labour market that will be needed to cool inflationary pressures on a sustained basis.”
ASB expects OCR cuts to follow in 2024, likely in May, “but not until the RBNZ is supremely confident inflation will settle in the 1-3% target range.”
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