A tight squeeze

While second-tier for markets, last week’s local economic news further fleshed out the picture of a ‘Goldilocks’ economy – businesses expect above-trend growth, inflation expectations are subdued, and population growth is booming. This is good news for New Zealand businesses, employers and property owners, but it will do nothing to ease the Reserve Bank’s angst around the Auckland property market.

We were particularly interested to see how the latest ANZ business survey – the first snapshot of New Zealand business sentiment since December – would digest the combination of emerging drought and lower fuel prices. In the event businesses have become slightly more upbeat on average, with expectations for their own activity actually rising across all major sectors. Surprisingly this was the case even in agriculture, which seems odd but may have been influenced by the recent rebound in dairy auction prices.

At the same time, businesses’ expectations for inflation in the next 12 months fell sharply to 1.7%. That’s the second-lowest level on record but not too surprising in the context of December’s weak inflation print. Indeed, it seems rather high given what inflation is likely to be through this year as cheaper petrol works its way through the annual figures. Perhaps respondents were thinking ahead to early 2016, when the impact of cheaper petrol will have started to wash out and our own inflation forecast is 1.7%.

The Reserve Bank is likely to have taken greater note of businesses’ stated pricing intentions. These were mixed, moderating further among retailers and construction companies, but rising slightly elsewhere – particularly in the agricultural sector, which again suggests that recent dairy auctions were a factor.