Rodney Dickens says the business confidence surveys have major political bias, and he checks how accurately these surveys signal growth trends

By Rodney Dickens*

The ANZ business survey has gone AWOL again.

Unfortunately, the bank economists and therefore the media haven't focused enough on the massive political bias that currently overwhelms the results of the survey and make it a poor input into business and investment decisions.

The NZIER business survey has been corrupted less by political gamesmanship but some components have become poor leading indicators while even the most useful component is under a cloud.

This Raving puts the two main components of the ANZ and NZIER surveys in context which is critical for assessing whether much if any weight should be put on them in making business and investment decisions.

When what were once useful leading indicators can't be relied on it increases the importance of having access to quality analysis of economic and housing prospects as input into business and investment decisions.

The ANZ business survey has gone AWOL again

Based on the ANZ business confidence survey the economy is heading for a recession (i.e. negative GDP growth) with significantly more firms negative than positive (left chart). Based on the ANZ own activity survey near-term prospects for annual GDP growth aren't so bad but growth should slow to below 2% over the first half of this year (right chart).

When these surveys tumbled in November after the election outcome was finalised the results were reported as if there was a significant threat to economic growth.

For example: "Business confidence tumbles to 8-year low in November"  and "Slump in business confidence poses 'material risk' to economy"

You can't entirely blame the journalists for reporting the survey results verbatim. They lack the resource and maybe knowhow to back-test the reliability of the surveys. Consequently, they rely on the bank economists to provide the appropriate interpretation, which is a mistake.

The headlines should have read:
"Businesses again hijack survey to make political protest"
"Survey greatly overstates economic risks from the change in government"

Prior to 2002 these surveys were useful indicators of near-term economic growth prospects as can be seen in the two charts above. Prior to 2002 the ANZ business confidence survey had a 0.7 correlation with annual GDP growth based on it being advanced or leading by three quarters while the ANZ own activity survey had a 0.8 correlation with GDP growth based on it being advanced or leading by two quarters. A 0.7 correlation out of a maximum possible 1.0 is akin to a 70% mark in an exam while a 0.8 correlation can be compared to an 80% mark (i.e. they were quite useful leading indicators of GDP growth).

However, since 2002 the ANZ business confidence survey has only 0.2 correlation with GDP growth based on leading by three quarters (i.e. akin to a 20% mark) while the own activity survey has a somewhat more respectable 0.53 correlation (i.e. like a 53% mark which is barely a pass). The coloured arrows in the two charts approximately reflect the periods when National and Labour were in power. It is more the case with the business confidence survey, but both significantly understated near-term GDP growth prospects for much of the period when Labour was in government and overstated prospects for much of the period when National was in government. When in early 2016 Reserve Bank Governor Wheeler effectively asked for feedback about the negative impact of the fall in dairy farm incomes on the economy both surveys conveniently tumbled temporarily; providing him the evidence he was seeking to justify OCR cuts.

In my assessment the ANZ economists should have pointed the political track record of these surveys when they reported the November and December results but instead they chose to downplay the relevance of the change in government on the surveys. Or, more correctly, the likelihood that the surveys had gone AWOL again meaning they should be largely ignored as leading indicators of GDP growth.

The NZIER survey hasn't been corrupted as much by political gamesmanship

Thankfully the commentary by the NZIER principal economist regarding the falls in many components of the NZIER quarterly business opinion survey was more balanced. This has in turn largely been reflected in the media commentary on the results of the December quarter survey (two quotes below and related links).
"Business confidence drops, with fewer expecting to hire or invest" and "NZIER business opinion survey shows the usual fall in confidence after a Labour-led government takes office, effect of election on actual business activity muted."

But there is still a lack of supporting analysis to put the NZIER December quarter results in context and in my assessment there hasn't been enough focus on political gamesmanship; instead, like the commentary accompanying the ANZ November and December surveys, the initial focus was on "uncertainty over new Government policies".

The left chart shows the NZIER business confidence survey has, like the ANZ business confidence survey, become much less useful as a leading indicator of economic growth since 2002. As the NZIER principal economist goes on to point out, it has generally had a negative bias while Labour governed and a positive bias while National government although this is only been the case after 2002.

By contrast, the NZIER own activity survey has a slightly higher correlation with GDP growth after 2002 than prior to 2002 (right chart below). The NZIER own activity survey has a peak correlation based on it leading annual GDP growth by one quarter although is this effectively means a two quarter lead given that GDP numbers take a quarter to be released.

Consequently, the fall in the NZIER own activity survey in the last two quarters should possibly be taken reasonably seriously in terms of what it indicates for near-term GDP growth. However, one qualification is that over the last year this survey has significantly overstated near-term GDP growth prospects. If that remains a case it means GDP growth will slow more in the near-term. A second qualification is that the latest fall in this survey may reflect at least an element of political bias.

When you can't rely on the insights provided by some of the business surveys and some question marks hang over even the most useful of them it increases the importance of making business and investment decisions based on quality analysis of economic and housing prospects. Our driver-based approach to forecasting that is supported by enlightened use of leading indicators rather than blind faith in indicators that have gone AWOL should be a must have for any businesses and investors wanting to make informed and profitable decisions.


*Rodney Dickens is the managing director and chief research officer of Strategic Risk Analysis Limited.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment or click on the "Register" link below a comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current Comment policy is here.

33 Comments

up
11

Yes it's amusing how many business owners buy into the "National is good, Labour is bad" myth. Why don't they simply do some research on the history of economic performance under both parties (when in government) and draw their own conclusions. It would help them make better decisions.

up
10

Perhaps it is even more simple than that. Labour mostly and NZF certainly have a platform that does not disregard the electorate in terms of the everyday folk on the street. Way back in Muldoon’s time, National had similar values. Over the last nine years it seemed to be that National was hell bent on creating Corporate New Zealand and as such the citizen taxpayer was as unimportant as any minority shareholder in any big corporate. Believe eventually enough of the electorate had had more than enough of that and turned accordingly.
So with a new government of different cloth it is fair to say, as this column contends, that business has had its favouritism negated and obviously that would mean , as a matter of course, a negative view of the present government.

I think you've stated a load of biased political idealogical clap trap.

But it was actually quite good ‘claptrap’.
Even Bob Jones agrees that Labour always stimulates our economy, while National strangles it, disregards it’s citizens and maximises advantages for global corporates.
Ironic -

There was irony throughout the late seventies and eighties - Muldoon operated a mild socialist government and Lange introduced neo-liberalism to NZ thereafter.

Only if you not interested in facts.

In my lifetime the number one and only thing governments in NZ are "hell bent" on is getting back into power.

‘New National’ is quite a different animal nowadays.
A small business owner, orchardest, family farmer, sole retailer, e-commerce operator, etc is likely to thrive just as well under this new government as the last.

If Bob Jones is correct then even the clap trap (unsubstantiated) claims that National "favoured" business is rubbish.

And the assertion that every party in NZ has a disregard for "everyday folk on the street" -- it's like reading socialist propaganda pamphlets from the 1950's before Solzhenitsyn wrote the Gulag Archipelago.

Truth matters you know and propaganda isn't it.

It wouldn't be fair to say that National 'strangles' the economy as such. It really depends what sector you are involved in and how much pressure it is applying to the Party. For instance, if you were a tourism or hospitality business owner, you would have been absolutely delighted with what National has done for you. Unlimited immigrant labour, worldwide promotion of the brand via their flamboyant prime minister, what's not to like? Ditto farmers with all the free money for irrigation they have provided, and how they basically absolved them of their climate change obligations.

But broadly, yes, they do make it more difficult to make money here with their short-sighted ethos of leaving things generally to the market and damn the consequences. Businesses are never going to thrive in a low-wage economy where the fruits of our activity are whisked away from spendthrift workers, who might like a night on the town or a resturant meal or two, and into the pockets of shareholders and owners who are looking to upgrade to their next european vehicle, play the housing market more, or simply stick it in the bank.

More clap trap

Labour is anti small business and anti landlords so it stands to reason. their two partners are probbaly even worse. They intend to increase regulation and business costs so I hope they rethink their uncosted and badly thought out plans.

up
12

I think you've stated a load of biased political ideological clap trap

Yes, actually that was biased political ideological claptrap.
Small business thrives under Labour as Fiscal spending expands which benefits all as opposed to earmarks for large corporates from National.

Ha, can see where your allegiances lie. Perhaps try a little unbiased thought yourself and you might like it. Too many restrictions and impositions on employers and mum and dad landlords to list.

Well, I have never voted Labour actually - just can’t handle the socialist philosophy/PC Correctness/prescribed worldview. But now, having watched over the decades, I realise that New National is no friend to SMEs or to the prosperity of individuals. And that Labour has been the change agent, and that their looser fiscal spending has a spin-off benefit for SMEs and households.

up
10

I'm in business and National never did anything for me (Labour didn't either) But speaking of the Nats they favoured the big multinational stanglehold on the supply of basics. Energy, finance, communications for example. Those big corps are allowed to extract vast profits, overcharge and put up business costs for the rest of us.
Similarly there is an outfit called 'Business New Zealand' constantly lobbying and doing media. Nothing they promoted was in my interest. When I realised they were supported by Employer Association, I decided to no longer be a member.

Wow kh so now you don't mind that labour has increased your income tax rates. And do you employ Staff? You don't mind that labour plays with your business costs buying votes from your pocket?

I 'mind' Labour a lot Houseworks. Read my post before commenting.

"No prosperity of individuals" really mb? I remember the days not so long ago under Clark regime when you weren't even allowed to prune any tree in auckland. it didn't matter that it was in your own garden and you planted it yourself. It didn't matter that it was causing a nuisance and breaking the drains or shedding leaves and clogging the spouting. Those days were a furking joke and when anyone wanted to change the rules there was a massive misleading outcry. Well good on national they got on and changed the rules

National went far too far with regulations about trees, hence Auckland has lost about 1/3 of its trees and counting.

Got a link that back ups your claim?

I would say rubbish to your 1/3 trees cut down when I look over the Waitakerei's and towards Hunua.

Residential trees are coming down as housing intensity increases. Where once was a 1/4 acre with a house and trees now we have 4 tenement town houses and no trees.

As housing density increases the room to plant trees disappears. Low shrubs are all you are going to get.

But 33% of all trees in Auckland gone? Nah.

Tricky, isn't it?

The global economic situation and what NZ has experienced during 2001-2008 and 2009-2017 are completely different.

NZ would also have good economic growth during 2001-2008 if you put a pig in charge.

Or a sow!

However a pig probably wouldn’t have paid down loads of public debt and put money into the Cullen fund, which would have meant 2009-2017 would have been quite different. A pig probably would have given tax cuts instead.

Personally, I pay as little attention to government as possible and just get on with it. Worked for me so far.

If the results of the survey can be characterised as a 'protest' by the business community, and they are being interpreted to us by exponents of that same business community (remember, NZ Herald et al's primary objective is shareholder returns), it makes you wonder how well-served we are by this kind of exercise.

"It is more the case with the business confidence survey, but both significantly understated near-term GDP growth prospects for much of the period when Labour was in government and overstated prospects for much of the period when National was in government. When in early 2016 Reserve Bank Governor Wheeler effectively asked for feedback about the negative impact of the fall in dairy farm incomes on the economy both surveys conveniently tumbled temporarily; providing him the evidence he was seeking to justify OCR cuts."

Just shows no matter who you are and how intelligent people try to sound, and how many facts people present to back up their arguments, their is always bias.

I felt a lot of anger in this article, the sort of rage the writer is feeling because he apparently didn't like the survey or how businesses expressed their sentiment of the "DAY"...!! ... the begging question is : Why??

Since when surveys have been an exact science which he is seeking credibility through correlation ?? ... Who cares who is at the wheel if the result of them being there is causing change of business sentiment? ... and why should we put a spin on what the businesses surveyed said or thought given the situation of "their" business today and views for the short term ?.... in addition to what "they" think and resolve from the new Gov policies and possible changes which could affect "Their" future business !!

So surely a new gov making the right noises would attract business confidence ...we would have thought.

why then, it is difficult to understand and swallow Mr Dickens ?? and why should we go back to history to project our future ?...let alone predict GDP etc... History has changed & Gone - not the same people (managers) , not the same parties, economics, business environment, wages, Margins, competition, international challenges and financials Influences are all different, population and employment are ALL different ! .... how dare anyone let us believe that we can correlate or reference that easily from a survey or two ??

These surveys are what they are...a glimpse of business opinions and expectations as to what "could" happen in the next 6-12 months knowing what they know today !! they are surely NOT reflecting " Business as usual " which started positively affecting the entire advanced economies since 2015, yet it is a pessimistic view for the future given the set of facts on the ground Today --- It could be slightly or moderately pessimistic, but that is how it is felt given this mix of information and desire to chnage. What is wrong with expressing true feelings ??

I am certain that everyone, including ALL these surveyed businesses, will be dancing with joy if these predictions were proven wrong in the next quarter or next 12 months ... and our future was rosier than we thought it was going to be .... maybe they are aimed for the Gov and RBNZ to take notice and take appropriate steps of investigation and correction.
We all know that it is hard to hide a pig under makeup regardless of Brand and Quantity !!

So rather than cursing the darkness, light a candle please, Sir ...

up
10

In these pages I have been called a lefty, yet for three decades I have voted for neither major party except this last one when I voted for Labour. Why? Because I considered National were taking us down a path that could collapse our entire economy. That path of course was our totally over valued housing. Furthermore, I was so disgusted with the selfish attitudes of property spruikers that I had more interest in this last election than at ANY time previously. I am still seeing comments that tell me that National are getting most support from self interested persons and not from those more interested in a better New Zealand.

Indeed.

All that is necessary for evil to triumph is for good men to do nothing because they have a vested interest.

Indeed & furthermore, with apologies to the great Russell, these days the ignorant are too loud and the intelligent too quiet.