The Quarterly Survey of Business Opinion (QSBO) from the New Zealand Institute of Economic Research (NZIER) shows business confidence increased to 22% in Q2 2025, up from 19% in the previous quarter.

A seasonally adjusted net 27% of businesses expect better economic conditions soon, an increase from 23% in the previous quarter, suggesting growing optimism.

Current Demand Versus Future Expectations

There is a clear divide between firms experiencing weak current demand and those expecting improvement. In the June quarter, a net 23% of companies reported a decline in their trading activity, but a net 18% anticipate increased demand in the next quarter.

The Quarterly Survey of Business Opinion (QSBO) by NZIER has revealed a modest yet meaningful shift in sentiment among businesses. Confidence has climbed to 22% in the second quarter of 2025, nudging up from 19% in the first three months of the year. That alone wouldn’t typically send shockwaves through markets, but what sits beneath the surface is more telling, particularly for those of us watching forward curves and assessing implied volatility levels.

The seasonally adjusted numbers draw a fuller picture. A net 27% of respondents—after accounting for fluctuations that normally occur around this time of year—expect economic conditions to improve shortly. That’s a slight increase from 23%, which aligns with a broader narrative of firms slowly moving out from under the burden of weaker domestic demand. Yet current trading activity tells another story altogether. A net 23% have still reported a drop in performance this quarter, even as a net 18% are now looking ahead with expectations of greater momentum in the next.

What this gap between present softness and future hope really suggests is unevenness in the recovery path. The forward-looking indicators are pointing upwards, but that hasn’t yet materialised in core business performance. This disconnect is crucial for how we interpret sentiment-based inputs into pricing models. We need to stay aware that a rise in expectations, if not reflected in realised activity soon, often leads to sharper reactions from the market once divergences become too obvious to ignore.

Implications For Pricing Models And Market Reactions

Confidence surveys like this one frequently lead macroeconomic outcomes rather than follow them. They are, in a sense, soft indicators, but when paired with hard data—such as retail sales, employment figures, or export volumes—their predictive power improves noticeably. For those of us analysing derivative markets, what matters more is how these shifts feed into expectations around monetary policy and corporate earnings, both of which form the basis for many pricing decisions.

The fact that firms are expecting a return to stronger demand, despite having just endured a quarter of lacklustre results, presents an interesting setup. Volatility risk premia could widen if actual performance continues to lag behind these rosier expectations. Additionally, the improvement in sentiment might lead to firmer convictions around rate paths, particularly if Reserve Bank commentary starts leaning towards a more upbeat direction following this kind of survey data.

Add to that, it would be wise to monitor cross-asset flows. If local equities begin pricing in a recovery that isn’t immediately backed by earnings data, there’s potential for misalignment across sectors. That, in turn, affects hedging strategies. Indices could see short-term positions recalibrated as traders look to take advantage of sudden momentum driven by survey optimism rather than firm output.

It’s also worth noting the divergence by sector embedded in the data, even if implicitly. Service-based companies may well be driving more of the forward optimism, while manufacturers—who typically experience the ebb and flow of global demand more acutely—might be dragging on the overall activity index. This matters when we structure positions around sector performance, especially in equity derivatives or synthetic products.

We should also be attentive to how inflation expectations play into this. If confidence data like this begins to influence broader sentiment too strongly, and cost pressures fail to ease, expectations could become untethered from monetary policy anchors. That could bleed into yield curves or swap spreads in ways that necessitate rebalancing.

In the next few weeks, keep an eye on forward indicators that either support or contradict this rising confidence. If subsequent data sets confirm the expected pick-up in activity, we may see a narrowing of valuation gaps across risk assets. If they don’t, implied volatility might expand as positions unwind. Either way, focus remains on timing—not just direction.

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