Economist Donal Curtin deserves our plaudits for an idea he threw out in August, suggesting on his blog that somebody ought to ask New Zealand businesses exactly what’s bugging them when they report low levels of business confidence.
The institute included a question in its survey to find what influences business sentiment.
The survey results are clearly awkward for the government, showing a further deterioration in business confidence. A net 28% of businesses expect economic conditions to worsen – the lowest level since March 2009.
As the NZIER acknowledges, firms’ own domestic trading activity is a better indicator of GDP growth than business confidence.
But firms’ own activity for the September quarter and expectations for the next quarter both fell, indicating a slowing in economic growth over the second half of 2018.
The NZIER press statement notes that through the 50-year history of the QSBO, businesses have tended to be more downbeat about general economic conditions than their own domestic trading activity. The difference between headline business confidence and firms’ own trading activity tends to be larger under a Labour-led Government.
Then it tells of the new information it sought:
This quarter, we added a supplementary question to delve deeper into the key influences on general business confidence.
We found Government policy, labour costs, consumer confidence, availability of labour and operating margins were the key considerations for businesses when it came to an assessment of general economic conditions.
Larger firms were more influenced by Government policy when assessing the general business outlook. Retailers, manufacturers and builders were more influenced by concerns over labour shortages and costs and consumer confidence.
This suggests uncertainty over the effects of new Government policies and higher costs have contributed to the decline in business confidence over the past year.
The NZIER spells out the deteriorating consequences…
Profitability continued to worsen, reflecting intensifying cost pressures for many businesses. Businesses remained pessimistic about an improvement in profitability.
This continued deterioration in profitability has made businesses more cautious, with a net 3 percent of businesses reducing headcount in the September quarter.
Businesses were also more circumspect about new investment, particularly for buildings. If profitability was to continue to worsen, businesses will likely hunker down and reduce investment and hiring
The downbeat mood was broad-based across sectors, the NZIER says, but manufacturers have overtaken retailers as the most pessimistic sector.
Weaker demand and rising costs have seen manufacturing sector confidence fall sharply.
Rising cost pressures also weighed on building sector confidence, with over half of firms in the sector reporting higher costs. Building sector firms reported some softening in demand in the September quarter, but architects’ measure of work in their office points to a pick-up in the pipeline of residential and commercial construction over the coming year.
And what was the most important influence on businesses’ assessment of the general business situation?
Check out the graph at the top of this post.
It’s government policy.
Curtin says it’s good to know more precisely what’s on businesses’ minds, but in the event it’s not hugely surprising.
“Most people had suspected that businesses were not enormously enamoured of various current economic policies, and sure enough government policy topped the list. The tightness of labour markets (staff availability, wage pressures) and its impact on profitability, are also right up there, as is profitability more generally.”
Hopefully the support from still very supportive fiscal and monetary policy will carry us through whatever slowdown occurs in coming months, Curtin says.
In particular, he notes that the lower Kiwi dollar has tilted overall monetary conditions in businesses’ favour,
” … even as the RBNZ has stood pat on already low interest rates. And let’s trust that the long-running post-GFC global business expansion will not blow a gasket, despite the best efforts of American tomfoolery to derail it.”
That’s Curtin’s upbeat take.
“But if there’s one thing that would give you special pause for thought, it’s ‘consumer confidence’ turning up in the graph above as businesses’ third most pressing worry. I didn’t expect it to rate so highly, but looking at it now, I can see why it’s there.
“I’d finger the petrol price as one big factor: here in Auckland the regional tax, the general rise in fuel excise, the high world price of oil, and the weaker Kiwi dollar have resulted in a litre of 91 costing $2.35 – $2.40, and households aren’t in a great place to absorb a thumping great whack like that.
“I also suspect that housing wealth effects, again maybe more in Auckland than elsewhere, have stalled or even reversed.”
The state of consumer confidence accordingly is something Curtin will be watching more closely.
He hopes rising wages in a tight labour market will alleviate some of the budget pressures from higher fuel prices.
He also suggests the September QSBO result of no rise in employment likely reflected firms’ inability to find scarce labour, rather than any cutback in hiring intentions, which remain positive.
He certainly wouldn’t want to see any job insecurity thrown into the already fragile household mix.