Is the Sword of Damocles hanging over the economy?  No. There are areas to watch and economic cycles can sometimes turn on a dime but that’s always a risk.

You’d think the Sword was above us going by business confidence readings.  A whopping 45 percent of firms are pessimistic about the general economy according to the ANZ Business Outlook survey.

The good news is that such measures are hopeless as an economic indicator.  The correlation with economic growth is a measly 0.2. Businesses tend to be more upbeat under a blue flag as opposed to a red one.  So we ignore business confidence as an economic indicator.

The bad news is that the likes of the ANZ survey are showing a sombre mood when it comes to the indicators that matter. This includes firms’ activity expectations for their own business, hiring and investment plans.  When these indicators head to zero – which they have done – growth tends to do the same.

Some of the weakness can be put down to the way questions are phrased.  Firms are asked their view and given three options; will conditions improve, stay the same, or worsen.  For a lot of firms’ things are pretty damned good. It’s telling that finding skilled staff is the biggest problem firms are facing.   Businesses are facing capacity constraints. So zero readings may reflect a levelling out at a high base.

However, it is clear that businesses are becoming more wary.

There is no shortage of candidates globally to derail the international and New Zealand economy.  Trade war fears are growing by the day. The global economy has more debt than prior to the 2008/09 financial crisis.  China is being eyed nervously. Australian house prices are falling.

The economy is eight years into an expansion and people naturally look more nervously over their shoulders after such a period.

Locally, we are seeing a major slow-down in the Auckland property market and this is impacting spending trends.  Credit is harder to get. Fuel taxes may be funding more roading investment but it also takes money out of people’s pockets.  Construction companies going bust or losing money does not help sentiment either.

Prospects for investment are being curtailed by access to credit, costs and lack of a sizeable domestic savings pool.  Costs are rising faster than asset prices, which is a disincentive for investment. Firms tend to hold off investing when uncertainty is high.  Migration is slowing.

There is a lot of hand-wringing over Government policy and economic direction.  Some of it is warranted and some of it is not. Businesses are being hit with a slew of costs and while there is no doubt some issues need to be addressed in some sectors regarding what they are paid (i.e. education), there is a sense of utu about some of the demands and what this means for firms bottom lines.  Some sectors are wondering if they are next after what has happened to the non-renewable sector.

Farmers are looking nervously where climate change and environmental policy is taking us.

It is taking the government and businesses some time to get their heads about the “new” economic model.

It’s a change that is needed but carries near-term costs.  The economy is going to see less growth via the wealth effect (the boost to spending from surging house and land prices), and little growth from the dairy and non-renewable sectors over the coming years.  More growth will need to come from other parts of the economy. The other parts will take time to step up. The government and policy-makers are underestimating this journey.

Small to medium sized businesses will be a critical part of this step-up story.  It was disappointing to see zippo in the 2018 Budget for small businesses.

But if you take out all the positives, of course you are left with something negative.

Interest rates are still low in New Zealand. Jobs are aplenty. The New Zealand dollar has fallen and this is supporting exporters.  New Zealand has one of the strongest fiscal positions in the western world. The slowdown in the property market is a good thing. Debt driven excesses are being curbed.  NZ dollar commodity prices are still strong, supporting rural incomes. The Government is running an expansionary fiscal stance (putting money into pockets and investing more).  Wages are lifting. Migration has slowed from 72,000 to 66,000; that’s still huge. Tourism numbers are buoyant. The pipeline for the construction sector is still huge. Normally at the top of the cycle we build too many houses.  This time can’t build enough. Some boutique sectors such as the gaming industry are really starting to fire.

The economy does not have the slew of red lights flashing that can precede a major downturn. We have some red lights but a lot are still green for go.  

All this does not preclude the potential for a hiccup.  They do make hiccups more manageable. It’s when you have an array of red lights flashing (inflation, high debt, weak productivity, housing excesses such as bubbles, a blowout in the current account deficit) that downturns can be deep and hurt.

A real danger at present is that businesses talk the economy into a funk and weak confidence becomes self-fulfilling.  A slowdown and moderation in momentum becomes a downturn. The government needs to provide greater clarity over the economy plan; simply saying the economy is transitioning without identifying the other side is not enough.  Businesses need to hold the faith too.

This article, including the insights and analysis contained within it, was prepared by Economist, Cameron Bagrie with the support of Xero through Xero Small Business Insights data. All data used is anonymised and aggregated. For the purpose of informing and developing policies to promote small business in New Zealand. It contains general information only and should not be taken as taxation, financial, investment or legal advice. Xero recommends that readers always obtain specific and detailed professional advice about any business decisions.


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