Will the first victim of business confidence be the lack of inquiry into the banks?

Tuesday, 7 August 2018

So far, Prime Minister Jacinda Ardern has suggested there is a disconnect between business confidence and reality, but that does not mean the issue is not already constraining her Government.

OPINION: Since returning to Wellington, Jacinda Ardern has been at pains to point out that compared to other countries, we still have it pretty good in New Zealand when it comes to the economy.

The Prime Minister has effectively reduced business confidence to nothing more than 'sentiment' preferring 'real' measures such as low unemployment and healthy Government forecasts.

For the business community, in a collective funk which has seen business confidence drop to levels not seen since the global financial crisis, this may feel like an unwanted sermon, but they would do well to look just across the Tasman.

National leader Simon Bridges has been espousing the strength of the Australian economy, pointing to new jobs in mining being created every few minutes. But the reception for the business community elsewhere is downright hostile.

* Prime Minister's business confidence push back: 'I'm interested in the reality'

* Booming employment market gives Crown accounts another boost

* ANZ says NZ economy 'delicately placed' as business sentiment hits 10-year low**

Since late last year, banking and financial services executives and senior managers are being called in, one by one, to face a Royal Commission grilling over alleged misconduct.

Under threat of prosecution for misleading the probe, careers have been destroyed in real time for the misleading and mistreating of customers.

As well as being in the public glare, the probe appears to have had an impact on banking behaviour, with the appetite for lending dropping.

Will the same happen here? The banking sector is not only hugely profitable here it is dominated by the same banks under fire in Australia, and both union officials and some in the financial community have called for an inquiry.

Treasury secretary Gabriel Makhlouf, pictured during the half year economic and fiscal update, delivered several months after the 2017 election. On Tuesday Treasury warned that a combination of international pressures, a cooling housing market and lower business confidence was meaning its forecasts were at risk of being downgraded.

For a few brief hours in July it seemed likely, when Michael Wood, the chair of the Finance and Expenditure Select Committee, gave an interview to business website Interest.co.nz saying that the chief executives would be hauled in for a Parliamentary grilling, invoking the 'public interest' in the issue.

But while this made the MP for Mt Roskill one of the most talked about politicians in banking circles, it appears he wasn't just jumping the gun, he was misreading the changing political mood, amid a speedy backdown.

While it is quite possible that some measure will be taken to appease union concerns that front line bank staff are responding to pressure to meet targets by selling products which customers do not need, any real heat seems unlikely.

With Treasury warning its forecasts are at risk from global pressures and plunging business confidence and the Reserve Bank expected follow suit and trim its own growth forecasts this week, there seems little appetite to heap any real pressure on a sector of the economy which is more critical to maintaining speed than any other.

This is especially important at a time when possibly the most political of economic indicators - house prices - is easing off as the market cools, especially in Auckland.

As Ardern deflects questions about whether her Government has been responsible even in part for the mood of business and minimises a campaign by employers to an argument over rest breaks, falling confidence already appears to be constraining the new Government.

The coming weeks could prove absolutely critical.

Most of the points raised by Ardern about the economy since her return are completely valid, but appeared to be aimed much more at the general public than the business community.

That business community may be politically biased and it may be overreacting, but effectively telling them that their perceptions are not the same as the reality may not win friends.

More likely to build trust would be some type of acknowledgement in striving to take New Zealand in a new direction, the new Government may have misread the importance of clarity or that business confidence may have been taken somewhat for granted.

As he releases his latest call on the benchmark official cash rate on Thursday, Reserve Bank governor Adrian Orr is expected to trim the central bank's forecasts for future growth.

But any acknowledgement or concession is fraught with risk for the Government. What would win support from the business community would be signs that policy will be developed in a way which it is comfortable, after nine years of National-led Governments which were willing to back down at the first sign that employer investor confidence could be at risk.

Already Ardern's Government is coming under heavy pressure from state-sector unions to make hefty pay offers to help make up for years of low wage growth.

Tuesday's agreement with the New Zealand Nurses Organisation will only have encouraged other state professions, especially teachers, to apply pressure to extract better settlements.

The same lesson applies to business, only the pressure will be felt through lobbying and publicity rather than the threat of industrial action.

If Ardern's Government was to offer a significant concession in the face of a fall in business confidence which so far she is not willing to take any responsibility for, then the pressure to bend on policy whenever the going gets tough will only increase.