Should we care that business confidence is so low?

Friday, 7 September 2018

Business confidence has become a subject of much debate in 2018.

Business confidence is one of a number of measures used to try to predict what will happen in the economy, which impacts whether companies will expand and the strength of the job market.

Economists refer to surveys of business confidence as 'soft data', which might provide a guide to the 'hard data' - the actual measures of how the economy is performing - which come later.

New Zealand has two major business confidence surveys. The quarterly survey of business opinion, conducted by the Institute of Economic Research (NZIER) is the largest and generally regarded as the most authoritative.

It asks around 4300 businesses (although only a portion respond in a given survey) about their current performance and expectations for the future, whether they are facing increased price pressures, whether they expect to take on more staff and how they expected the general economy will perform.

* ANZ warns the threat to activity 'is real' as business confidence stays in the doldrums

Finance Minister Grant Robertson and Prime Minister Jacinda Ardern have repeatedly said that the underlying picture for the New Zealand economy remain positive, with low unemployment, a healthy government balance sheet and projected surpluses. But business confidence is at a level which would typically suggest the economy is heading for a slowdown.

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

The QSBO targets certain industries which might give an idea of where the economy is heading (such as the architects as a guide to how the construction sector might perform later) although it does not directly survey farmers, still a major sector of the economy.

Because the QSBO, which was established back in 1961, is only released once every three months, so the monthly ANZ business outlook survey can gather more attention.

The ANZ survey asks similar questions to other surveys to around 1500-2000 firms each month (excluding January), with 300-400 typically responding. Although the number of respondents is relatively small, ANZ said it is drawn from a broadly representative sample of the types of businesses which make up the New Zealand economy.

Business confidence has became a highly contentious political issue in 2018, with the most simple measure suggesting New Zealand businesses are now more pessimistic than at any time since the global financial crisis.

The simple measure of business confidence simply asks businesses how they expect the overall New Zealand economy to perform in the coming year.

It tends to be volatile and there is strong evidence that the measure is biased, with confidence tending to be much stronger when National is in Government than Labour, irrespective of how the economy is actually performing.

This has seen some commentators and even at least one cabinet minister dismissing the surveys as 'junk'.

However, other measures in the survey, based on questions about how the respondents expect their own business to perform, whether they are planning on hiring new staff or invest in new equipment or property, are seen as a much better guide to how the economy will perform.

When the latest ANZ survey was released on August 30, the New Zealand dollar dropped around half a cent against the US dollar.

The drop reflected bets that the survey predicted that the economy would slow in the second half of 2018 in such a way that the Reserve Bank would be forced to cut interest rates.

ANZ chief economist Sharon Zollner said the way investment intentions had fallen posed a threat to economic activity in the short term.

However, Zollner does caution that while this measure tends to be a good predictor of future economic growth, it sometimes gets it wrong.

Back in 2015, as dairy prices plunged, as did investment intentions. However the New Zealand economy continued to grow strongly, because at the time the housing market was so strong it overwhelmed the fall in farm income.