NZ business confidence bounces in May but Middle East cost squeeze persists

§ 01 Executive Snapshot

• What: New Zealand business confidence increased significantly in May.
• Who: ANZ New Zealand, ANZ Research, various sectors including manufacturing, retail, and agriculture.
• Why it matters: The rise in confidence is set against a backdrop of persistent cost pressures and inflation concerns stemming from the Middle East conflict.

§ 02 Key Developments

• ANZ-Roy Morgan Business Confidence rose 21 points in May to +10, recovering from -10.6 in April, though remaining well below levels prevailing before the Middle East conflict, per ANZ Research.
• Expected own activity rose 6 points to 25.6, with manufacturing the standout at +28 and retail the laggard at +8, per ANZ Research.
• Cost expectations held at 90.4% of firms reporting higher costs, unchanged from April, with agriculture hitting 100%; three-month cost expectations eased from 4.57% to 4.08% but remained well above pre-conflict levels, per ANZ Research.

§ 03 Strategic Context

• The improvement in business confidence is notable but uneven, particularly strong in manufacturing while retail and construction struggle, reflecting broader economic conditions post-conflict.
• The persistent high cost expectations indicate a constrained profit environment, complicating the inflation narrative and affecting monetary policy decisions by the RBNZ.

§ 04 Strategic Implications

• Immediate consequence: The rise in confidence may lead to cautious optimism in business investments despite ongoing cost pressures.
• Long-term implication: Continued inflation pressures may force the RBNZ to maintain or adjust monetary policies more stringently, impacting economic growth trajectories.

§ 05 Risks & Constraints

• Potential risk: Ongoing geopolitical tensions in the Middle East may exacerbate cost pressures and disrupt supply chains, affecting local businesses.
• Potential risk: If inflation expectations do not stabilize, it could lead to tighter monetary policy that stifles economic recovery.

§ 06 Watchlist / Forward Signals

• Forward signal 1: Monitor upcoming ANZ Business Outlook surveys for changes in sentiment and cost expectations.
• Forward signal 2: Watch for developments in the Middle East that could impact global supply chains and inflation metrics in the New Zealand economy.