New Zealand Business Confidence Soars Despite Oil Price Headwinds

New Zealand business confidence surged in the September quarter, reaching a net 40% of firms optimistic about future economic conditions, up from 14% in the previous quarter. This rise in confidence occurred despite challenges like higher oil prices due to renewed US-Iran conflict, which has dampened global fuel markets. The retail sector showed the most optimism, with a net 57% expecting better conditions, while the building sector also saw a significant improvement to a net 46%.

However, actual trading activity remained flat to slightly weaker, with a net 1% of firms reporting a decline in domestic trading. The rise in confidence was driven by stronger investment intentions, with firms planning to spend more on buildings, plant, and machinery. Despite a net 5% of firms cutting staff in the quarter, many plan to hire in the coming months, indicating a tightening labor market and eroding spare capacity.

Cost pressures eased slightly, with the share of firms reporting higher costs falling to a net 47% from 54%. Fewer firms raised prices, reducing the risk of higher fuel prices feeding into broader inflation. The Reserve Bank of New Zealand has some room on the inflation side, but firms widely expect interest rates to rise over the coming year, which could restrain household spending as loans reprice.

The survey highlights a disconnect between firms' optimism and their current trading conditions, with oil prices remaining a wildcard that could impact the economy negatively. The NZIER noted that while the immediate hit to sentiment from Middle East developments is muted, geopolitical uncertainty and global oil supply remain significant headwinds for New Zealand's recovery.