• The gap between hopeful optimism and the harsh reality of daily business, continues to widen. As to be expected, firms are looking to the economic recovery with greater confidence. Interest rates have fallen. But activity has failed to lift (yet). And it’s showing up in price pressures. Experienced costs are easing, that’s great; but pricing power is evaporating, not so great.
• The NZIER correctly deduce that: “Overall, these indicators continue to suggest inflation pressures should be contained in the New Zealand economy.” And that’s key for policy. Rate cuts are required to lift failing activity, without much fear of fuelling inflation.
• The QSBO survey may have shown a lift in optiism. But confidence is fragile, and at risk of reversing if offshore forces deteriorate. The RBNZ should cut below 3%

“The latest NZIER Quarterly Survey of Business Opinion (QSBO) showed firms remained optimistic about an improvement in the general economic outlook. This upbeat mood remains in stark contrast to the continued weak demand as reported by firms.” NZIER

Being optimistic is one thing. We’re optimistic about the outlook. Because interest rates are falling and feeding through to households and businesses. A net 27% of firms expect brighter days ahead, up from 23%. In the same breath, a net 23% of firms recorded a decline in activity. And 68% of firms put a ‘lack of sales’ as their primary constraint on their businesses. “The continued divergence between optimism about the general economic outlook and weak activity was widespread across the sectors.” NZIER

The survey’s divergence mirrors the feedback we’re hearing from our SME business owners: I expect things to improve, after a miserable few years. But I haven’t seen it yet. I want to expand into 2026, but I have my plans for investment on the shelf. I want to expand into 2026, but I’m going through my third restructure to gut costs. I’m optimistic about tomorrow, but I’m realistic about today. And reality bites.

The results are not unexpected. The divergence has been in place for a while now. The lift in confidence has been steady, since the depths of despair this time last year. But the economy is crawling, not running, out of the recession. And the argument for stimulatory monetary policy is unequivocal. Interest rates must be lowered to stimulate activity.

But what about inflation? Will lower rates fuel inflation? Not yet. The cash rate of 3.25% is close to neutral, and is not stimulatory. And firms are saying they are feeling less pressure, and passing on less pressure. Fewer firms are reporting an increase in costs (42%, down from 50%), and there’s been a reduction in pricing power and passthrough.

And then there are the risks…

The risks to the global outlook, and New Zealand’s outlook, remain tilted to the downside. We have a lot of headline risk, particularly out of the Trump administration. The run of recent news has calmed market participants, for now, but we’re still waiting on trade deals. We expect most to get done, and end up close to 10%. But risks remain. The geopolitical landscape is simply more hazardous.

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