December NBNZ Business Outlook: Farewell inflation expectations

The National Bank Business Outlook for December came out the other day, and it was another horrible looking figure for business confidence.

Two key points for me, beyond what we have discussed earlier.:

  1. Own activity expectations are horrible,
  2. The inflation expectations measure collapsed.

The first covers the most important statistic in the series – own activity.  It was terrible, implying that businesses are feeling very negative for their own performance over the coming months.

The second statistic is an important one when thinking about inflation – it was inflation expectations.  This series is relatively stable, but it has now dropped sharply.  In conjunction with “pricing expectations”, and the “RBNZ inflation expectations numbers” this implies that core inflationary pressures are abating quickly.  Also note there was a strong decline in construction – component prices have held up building cost inflation, but this may now be a thing of the past.

Of course the main issue is the “relative price” adjustment between labour and goods – even if inflation goes to zero, if the value of labour has fallen as a result of this crisis we could still be heading towards excess unemployment.