Reserve Bank unlikely to be swayed by weakening business confidence

Business activity measures continued to weaken in the last quarter, while inflation gauges are steadily heading in the right direction.
Those were the key takeaways from the latest NZ Institute of Economic Research quarterly survey of business opinion for the period to the end of June.
And while the Reserve Bank will be encouraged to see inflation continuing to ease, the pressure on businesses remains unrelenting in the face of higher costs and tighter margins. Just don’t expect the central bank to change its outlook that much when it announces its latest monetary policy review this Wednesday.
The key results (seasonally adjusted) from the survey saw general business confidence continue to fall to -35.4 percent (versus -24.9 percent in March), while trading activity for the past three months edged lower to -27.8 (versus -24.2 in March).
On the plus side, the number of businesses reporting a rise in operating costs over the previous 3 months fell to 41.3 percent (versus 52 percent previously) and more importantly for the RBNZ, the number who increased output prices over the past 3 months dropped to 22.4 percent (versus 33.4 percent previously).
While businesses generally remained downbeat on their own prospects and those of the wider economy, the measures of cost and price pressures suggest that inflation will continue to ease, though this process will continue to take time.
Other activity indicators were generally weaker in June. Notably, the labour shortage that dogged businesses this time last year is no longer an issue with many firms reporting they rapidly reduced their head count last quarter.
Cost pressures remain elevated with a net 41 percent of firms reporting cost increases over the last three months, though this is down from 52 percent last quarter and a peak of 80 percent at the end of 2022. There were similar falls in firms’ past and expected pricing.
BNZ economist Stephen Toplis said the net 22 percent of businesses intending to increase prices was a marked drop on the 33 percent who thought likewise in the previous quarter and encouragingly was the lowest reading since December 2020.
“It would be a rarity for headline inflation to be outside the target band with this level of intention. Moreover, there is no reason to believe the drop in pricing intentions is yet complete. The momentum is viciously downward.”
However, Toplis also pointed out that these intentions will tend not to capture the ‘sticky’ non-tradables prices that are likely to continue to keep headline inflation (and more so non-tradables) aloft.
“Businesses, generally, may be struggling to raise selling prices but local authorities (who aren’t surveyed) and insurers don’t seem to be having much difficulty in hiking prices at a double-digit pace,” he said.
While Toplis believes that momentum is clearly building towards the need for interest rate cuts, given inflation remains outside the RBNZ’s target band he says their hands are tied.
“In our humble opinion, this latest [survey] screams cut rates sooner rather than later. Indeed, this is our central view. But we still think the RBNZ will want to see inflation within its target band before it pulls the trigger and that could still be some time away.
“We believe the RBNZ will ultimately ease much earlier than it currently assumes. But, equally, there are a number of conditions that will have to be met before it springs into action. We still reckon February 2025 is the most likely starting point, but we also think that by November of this year the necessary conditions will be met for the RBNZ to finally give a clear indication of its intention to move early in the New Year.”
However, the case for moving earlier than the new year increased last week with ASB Bank economists changing their outlook and joining Kiwibank in picking the Reserve Bank will deliver its first rate cut in November.
Right now, an early Christmas present from the Reserve Bank may be the best that businesses can hope for.
The NZ sharemarket finished another lacklustre week with a small gain of 0.6 percent as the benchmark NZX50 index remains stuck in a narrow trading range bouncing between 11,600 and 11,800.
Investors will be looking for any clues in the Reserve Bank’s latest monetary policy review due out this week regarding its outlook for interest rates, though the central bank is unlikely to deviate much from its previous stance of remaining on hold for now.
With the next round of earnings results due in a little over a month investors will be able to get a clearer picture of how companies are navigating the difficult trading environment currently being experienced.
Shares in Eroad and Port of Tauranga were the standout performers last week gaining 24 percent and 10 percent respectively.
Investors it seems have begun to see value in vehicle tracking software company Eroad after the company delivered a significantly improved result recently for the 2024 financial year, reporting a net loss of $300,000 compared with a $3 million loss in 2023. Revenues rose 10.1 percent to $182m in the year to March 31, 2024, while pre-tax earnings were $800,000, compared with negative $7.9m in the previous corresponding period.
It’s been a particularly painful return to form for Eroad shareholders after a steep decline in its share price in recent years from $6.70 in July 2021 to a low of just 52 cents last year. However, it appears the company might finally be gaining traction once again after achieving positive cash flow of $1.3m compared with negative $29.9m in FY2023.
Port of Tauranga shares rebounded strongly last week after brokers Forsyth Barr upgraded the outlook for the blue-chip infrastructure stock from neutral to outperform.
The country’s largest port stands to materially benefit from moves by its competitor Port of Auckland to hike user charges aggressively Forsyth Barr noted.
It’s forecast for underlying net profit in the 2024 financial year was revised upwards by one percent to $103.8m, by five percent to $118.2m in 2025 and by eight percent to $135m in 2026.
The upgrades principally reflected higher container terminal volume assumptions in all years, helped by a higher base in FY24 and a partial recovery in MetroPort volumes from FY25.
Across the Tasman, Australian investors were rattled by news that the Reserve Bank of Australia had considered hiking interest rates at its most recent meeting before judging that it was possible to return inflation to within its target band under current settings.
Ahead of this week’s special shareholders meeting, a new independent report has found that Synlait shareholders can “buy time” for essential capital restructuring by approving a $130m loan from cornerstone shareholder and Chinese state investor Bright Dairy.
The report from advisers Northington Partners says the terms of the Bright loan are concessionary and therefore fair to minority shareholders.
As the loan’s provider, Bright is excluded from voting its 39 percent shareholding, while 19.8 percent shareholder and major customer a2 Milk has not yet indicated how it will vote on approving the loan.
The vote will be held this Thursday shortly before Synlait must repay $130m of senior bank loans on July 15.
The independent appraisal commissioned by Synlait’s board summarises the company’s financial history before assessing the terms of the Bright loan and possible consequences. It noted that its domestic dairy foods company Dairyworks had been unsuccessfully advertised for resale since June 2023, thereby necessitating a loan facility to be put in place to meet its debt repayment obligations.
Synlait recently announced that a significant majority of its supply farmers have submitted cessation notices which will take effect in mid-2026.
“Rebuilding supplier confidence and securing the withdrawal of these cessation notices is clearly going to be a key element of Synlait’s recovery plan,” the report noted.
The Northington report also noted that in four of the previous seven financial years Synlait had recorded between $130m to $155m in pre-tax earnings, but in FY20 that shrank to $50m. In FY23 it rebounded to $81m before slumping again in FY24 and is now forecast to be less than $50m.
While the loan itself will have no immediate effect on Synlait’s overall debt position as it will be used to repay senior bank loans by July 15, it will provide more time for recapitalisation.
However, if the loan is not approved Synlait will likely be placed into voluntary administration or receivership.
“The ultimate outcome for shareholders under any insolvency process is highly uncertain and we do not consider that approval of the shareholder loan would disadvantage shareholders,” the Northington report concludes.
Synlait shares closed on Friday at 24.5c after reaching a low of 20c recently.
Cryptocurrencies fell sharply on Friday (US time) as investors focused on a payout of nearly US$9 billion to users of collapsed bitcoin exchange Mt. Gox.
Earlier in the day, bitcoin slumped to a low of US$53,510, marking its first time trading below the $55,000 level since late February, while rival token ether sank around five percent to US$2,972.
At one point, the entire cryptocurrency market had shed more than US$170 billion in combined market capitalization in a 24-hour period, according to CoinGecko data.
On Friday, the trustee for the Mt. Gox bankruptcy estate, Nobuaki Kobayashi, said in a statement that it had begun making repayments in bitcoin and bitcoin cash to some of the creditors through a number of designated crypto exchanges.
However, the statement didn’t specify how much money had been transferred to these exchanges.
The distribution of around $9 billion worth of coins to users has created a significant ‘overhang’ in the price of bitcoin which has led to the slide in its value.
The sudden slump in crypto led to hefty liquidations in the derivatives markets, according to crypto data firm Coinglass. It reported more than 200,000 traders had their positions, worth a combined US$639.6m, liquidated in the past 24 hours.
Mt. Gox, the world’s largest bitcoin trading exchange at the time, collapsed in early 2014 as a result of a sophisticated hacking attack, leaving an estimated 24,000 customers around the world without  access to hundreds of millions of dollars’ worth of cryptocurrency and cash.
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