Does business confidence foretell a slowdown, or mark a corporate conspiracy

Friday, 7 September 2018

Depending on who you listen to, New Zealand is either gripped by pessimism normally felt during recessions, or witnessing a cynical political move by business groups, trying to second-guess the new coalition's economic and labour law reforms.

'New Zealanders will suffer as a result of this,' National Party leader Simon Bridges warned at the end of July, minutes after a new survey pointed to deepening gloom among executives.

The new Government was having 'the same effect on business confidence as the global financial crisis did a decade ago', Bridges told reporters in Parliament.

Economic Development Minister David Parker, meanwhile, has dismissed measure as 'junk' and a key survey as 'a survey of the vibe of a self-selecting subset of CEOs'.

Heads of local chambers of commerce have urged the Government to abandon plans to reform labour laws or risk hurting the economy, while unions have dismissed the feelings of business as no more important than anyone else.

In the roughly 10 months since the new Government was formed, business confidence has become arguably the most watched, and debated, measure of the economy.

As leading economists warn the prevailing mood could threaten New Zealand's economic growth and labour market, others have dismissed the issue as pure political bias, while cartoonists have portrayed chief executives as crying babies.

Low Business confidence. My cartoon for today’s @NZStuff #nzpol pic.twitter.com/ylW3xf6As1

— Jeff Bell (@JeffBellNZ) August 5, 2018

But oddly enough, whatever the name suggests, no one is actually asking businesses how confident they are. And while the surveys are being closely watched, what we normally think of as business confidence is virtually dismissed by experts.

In the monthly survey by ANZ, and the larger quarterly survey of business opinion (QSBO), the measure of 'business confidence' is drawn from a question of how business leaders expect the entire New Zealand economy to perform over the next year.

Despite the attention it attracts, the measure is seen as flawed, largely because business leaders are not in a position to know and are likely to be biased by day-to-day headlines or a change in Government.

ANZ chief economist Sharon Zollner said the question was designed in the 1980s and has been maintained ever since as the key metric because of its 'intuitive appeal' to media and the public. But no one in financial markets considered it particularly important.

'No economist would use headline confidence to forecast GDP [economic growth],' Zollner said.

'It gets pushed around not only by politics, but by all kinds of headlines. You're basically asking people to play economists … probably based on very little information.'

While she dismisses the importance of 'headline' business confidence, Zollner's commentary alongside ANZ's monthly business outlook is of real concern.

The surveys not only ask about the general outlook, but also about respondent's own business, whether they expect to take on new staff, invest in their business or if they are facing increased costs.

At the end of August, ANZ examined what falls in investment and hiring intentions meant for the future of the economy 'and conclude the threat to near-term activity is real'.

The number of businesses expecting to be busier in the next 12 months than the last year remained positive, but remained extremely close to the number expecting business to go backwards.

Businesses which said they expected to cut back on staff and investment, exceed those saying they would increase.

With some exceptions, when hiring and investment intentions fall, so does economic growth.

If the Government was maintaining that the survey was simply a kind of political poll of executives, which tend to prefer National to Labour, financial markets were spooked, with the New Zealand dollar dropping sharply in the minutes after it was released.

The price of interest rate swaps - products which predict future interest rate moves - now imply there is around a 50 per cent chance that the Reserve Bank will cut the official cash rate to a new all time low in the coming year.

So are we slowing?

While his colleagues and others on the Left have been dismissing the fall in confidence, Finance Minister Grant Robertson has pointed to the general outlook for the economy as being positive.

Unemployment is low, the Government's finances in good shape compared to many other advanced economies and Robertson's first Budget which would put more money in the hands of lower income families, which tend to spend every dollar. 

Although he has stated repeatedly that the economy is in a transition away from property speculation and rising house prices, Robertson has doggedly maintained that many economists still forecast the economy will grow at close to 3 per cent.

Prime Minister Jacinda Ardern made shoring up business confidence one of the main focuses of the weeks since she returned from maternity leave.

'We've run a strong surplus, have the best net international investment position ever recorded, stable and low interest rates forecast for some time which ought to spur investment and the lowest unemployment rate in a decade,' Ardern told an audience in Auckland, part of a charm offensive to convince New Zealand's businesses of the coalition's plan.

Zollner, for one, says the economy is simply cooling, rather than heading for recession and could grow at more than 2.5 per cent in the coming year, which is a slow down, but is hardly a major concern.

Other observers of the economy warn the outlook in the relatively short term is worse than is currently being acknowledged.

Cameron Bagrie, Zollner's predecessor who is now independent, warns that over the last couple of months, there were growing signs the economy was stalling.

'The economy was gong okay until the end of June. I'm starting to get increasingly worried about where things sit over the September quarter' - the three month period which ends at the end of this month.

While consumer confidence was holding up, Bagrie said investment intentions were pointing to growth of close to zero in the second half of the year.

Robertson's claim that the economy could still grow at 3 per cent was 'a pipedream'.

'There is daylight between what those surveys tell us and what consensus seems to be'.

House prices were easing, which would likely soften the 'wealth effect' of consumers spending freely as their assets went up in value.

The dairy sector was likely to contract for a number of years, while the mining and oil and gas sectors were also likely to contract, amid changes in Government policy.

Migration was also easing back, faster than official forecasts assumed, which prompted Treasury to warn could also lower growth. Bagrie said when the sectors which were now dragging on growth were added up, the impact on economic growth would be large. The transition Robertson was talking about was real, but was unlikely to happen at the same time as healthy economic growth.

'I think most people think, okay, that economic model was unsustainable, we've got to look at something new. The problem is, we're not unlocking the something new.

Brad Olsen, an economist at Infometrics, said decisions to abruptly change the settings for oil and gas exploration and some aspects of employment law reform were causing uncertainty, which he believed was key to the fall in confidence.

While Robertson was acknowledging the need for the economy to transition away from a booming housing market and record immigration, he may have overlooked the impact it would have on growth.

'The government's made it clear that they are looking to retool the economy and set it on a different direction. I think any time you try to do that, you'll need to soften for a bit because you're pivoting,' Olsen said. 'You can't have your cake and eat it.'

Bill Rosenberg, an economist and director of policy at the Council of Trade Unions said that the drop in headline confidence came as companies were being told constantly about the lack of certainty they were facing, and he believed this was likely influencing other measures. 

'They're being told so many times by business leaders that they shouldn't have confidence that things like investment intentions are affected by this too.'

While there were reasons to be nervous about the state of the economy, from the high level of household in New Zealand and government debt around the world, to threats of a global trade war threatening to undermine exports, Rosenberg believed all of these would have been the case whoever was in Government.

Yet according to claims by business leaders and the Opposition, the current plunge in business confidence was being presented as a situation driven exclusively by the new Government. In fact the Government had 'gone overboard' to include business groups in conversations about its plans, Rosenberg said.

It was critical that the Government did not back down to what appeared to be a campaign to frustrate its agenda.

'If the Government does blink there's a risk that business will be emboldened and say there's no right for a new Government to make their changes.'