David Hargreaves ponders whether the bottoming levels of business confidence are really pointing to a substantial economic slowdown

By David Hargreaves

Economic growth figures are always watched closely - particularly by those economist-types. It's fair to say though that seldom will, particularly GDP figures, have ever been as closely followed as those for the second half of this year will be.

You see, the big debate now, which will only be resolved by those second-half figures is over whether the through-the-floor business confidence levels are posturing, or whether they are foretelling a significant economic slowdown.

Everybody has an opinion on that one, but it's fair to say nobody knows, nor can they.

The only way we will know is when we do see the economic figures as they develop for latter part of 2018 and into 2019.

What we do know is that businesses have been resoundingly grumpy about this Government virtually from day one, but this has contrasted with an actual economy - to date - keeping on keeping on.

But of course the June quarter GDP figures, as impressive as they were, are now already ancient history. 

Reasons to be cheerless

There are plenty of reasons for businesses to feel nervous. The global situation is carrying huge numbers of uncertainties at the moment. We don't know, for example, how far this trade war situation will go - but right now the portents are not good, particularly when one of the protagonists is so, ahem, unpredictable.

As interest.co.nz commenters have pointed out, uncertainty about global developments is likely a big part of the falling confidence our businesses are feeling. But this feeling for them is probably being exacerbated by a lack of comfort being provided by the Government. 

Businesses, particularly in a tiny country like New Zealand, are always to at least some extent hostage to fortune in terms of global developments. They have no control over what happens internationally.

Where businesses do want to feel more in control is at home, where they can talk to their Government, form a good dialogue and the Government sets a clear framework for them to operate under.

Labour-led Governments are at a distinct disadvantage when they come into power. The traditional knee-jerk response from business is to expect that Labour will do business-unfriendly things.

It's arguably unfair, but Labour therefore has to actually be super-accommodating, more so than National does in Government, in order to reassure business.

And that's where this Government has to date come unstuck.

It's complicated

It was of course even more complicated for Labour than usual this time around, given that it's the senior partner it what is effectively (though not technically) a three-way coalition and of course with an Opposition party in National that recorded by far the biggest individual share of the vote in last years' election.

So, on top of the 'normal' suspicion of Labour, you got the suspicion of who was having what influence within the Government and then the feeling that in some way it was not a 'legitimate' Government because National got way more votes than any other individual party.

What this meant was that this Labour-led Government had to be super, super careful and accommodating for business.

I would argue that, certainly at least since the Clark-led Labour Government beginning in 1999 - and this may well in some way be a developed product of the MMP system - we've had Government policy in this country in large part determined, or at least moderated, by public opinion. Both the 1999-2008 Labour Government and the 2008-217 National Government appeared to rely very heavily on real-time polling and would alter and moderate policies as and when issues emerged that looked problematic.

I always got the impression the Clark Government would have liked to have gone much stronger on dare I say a socialist agenda and certainly with a fair degree of what might be termed social engineering in the mix. But while there was elements of that, in reality it trod a fairly central and cautious line - and if you were to think of some of the things that were done under that Government, including the setting up of the NZ Super Fund and the establishment of KiwiSaver, well, you would say - not bad.

Likewise National under John Key would also produce policies in reaction to shifts of public mood. It's hasty introduction of the 'bright-line' test to tax profits on quick-flick house sales was a classic example of that.

The point of saying all that is that the public and by extension, businesses, have become accustomed to policies and Government decision making not exactly by consensus, but by in means in which public opinion was filtered and very much added into that decision making process.

Curb your enthusiasm

So, cue this Government and we've got Labour, full, no, over-full, of enthusiasm about being in Government again after nine years and going about the job like a bull at a gate. I didn't like the first 100 days thing that the Government did, since it encouraged a sense of haste. And hasty decisions are seldom good ones.

I've been saying on this site for a good few years now that I support the idea of some type of ban on offshore buyers of existing houses. Labour said it would do that. Then Labour found out it could not do a ban in the practical and logical way Australia has done it for the reason that some of our trade deals won't let us. Now the rational response would have been to rethink it and tackle the issue another way. Personally, I think they should have beefed up the collection of information on who is buying houses - since we still don't have good information on that. This would have been a good starting point for establishing the extent of the perceived problem and for finding solutions.

But no, the Government wanted to make the grand gesture. So, faced with all the apparent difficulties in implementing a foreign buyer ban, it came up with a way that it said would implement a ban. I was appalled by the initial legislation they came up with. Dog's breakfast is too kind. It has been fixed to some extent by some very diligent work in Select Committee, but it remains to be seen how well it will work now that it's law and whether there will be unintended consequences.

That whole episode caused a lot of suspicion though in the business community because rightly or wrongly it painted the Government as being anti foreign investment in this country.

The big gesture

I mentioned the term 'grand gesture'. And that's something the Government seems very much overly fond of. A big pronouncement. A line in the sand. The foreign buyer ban (which in reality is more than that) is one such example, and then the worst example is the oil and gas exploration ban. Big, largely empty gesture, which leaves you saying, well okay, but what next? As somebody who doesn't even own a car, I'm very much aligned to the idea that renewable energy is the way to go but, hey, show me that you've got the plans and the means to get New Zealand fully functioning on renewables before you slam the door on those old 'dirty' fuels.

So, more suspicion from the business community.

Hey, though, some good news is that the message is definitely getting across to the Government. If you look at the reaction from business to the R&D tax breaks announced on Wednesday then clearly business can be swayed by policies that look well thought out and are well enunciated.

And I think there is every chance we will see more of that from this Government now. The realisation is there that you can't just go on making these big pronouncements and thinking you will drag the country with you, because if the country doesn't want to be dragged, it won't be. 

A question of confidence

All of which brings us back to the confidence of business and whether that low level at the moment is going to portend to a significant slowdown.

There's a lot riding on the next few months. 

The Reserve Bank under new Governor Adrian Orr - and under its new monetary policy mandate that includes employment - is clearly seen as more prepared to take a risk on running the economy a little 'hot' in order to stimulate growth and inflation.

And Orr's made clear that he's prepared to lower the Official Cash Rate if the economy falters. 

ASB senior economist Mark Smith has put out a really good economic note that summarises the circumstances under which the RBNZ may drop interest rates. Have a read, it's well worth it.

Smith makes the following point: "To us, the persistent weakness in business sentiment measures is becoming increasingly concerning. If this dampens economic growth and results in greater economic and labour market slack, it will become more of an issue of when rather than if the OCR touches new record lows."

What is going to happen then?

Personally, I think that now the Government really does seem to be getting the message and also it's probably getting a little more used to the idea of being in Government and let's face it, how to handle the job, then business is going to become more on-side with the Government. I think business opinion surveys have probably hit the low point and will start to improve from here.

I don't think the economy is going to slow as much as the surveys have suggested, nor do I think interest rates will be cut. On the contrary with rising oil prices and a few other capacity constraints evident, I think inflation is going to surprise on the upside. And I reckon in six months’ time we'll be talking not about interest rate cuts, but about rises.

I could be wrong of course. It would not be the first time.

Either way, the next six months look like they will be real interesting.

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?

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27 Comments

I dont think a lack of confidence in the business sector will lead to a recession .

Recessions or slowdowns tend to be triggered by shocks , such as currency crises , stock market routs , interest rates going up too much , or external factors such as a recession in Europe or the us OR an oil price going over $100bppl

in theory yes, although I seem to remember NZ went into recession prior to the gfc. This was through bad policy introduced by Labour over the 2-3 terms it was in power. We had an explosion in credit, rampant consumer spending, and high interest rates.

Roll on 10 years and we have had a huge debt splurge. Government policy appears to be finally reigning that in. Whether this results in a similar pattern, and recession, will depend on how robust our rockstar economy is.

Behaviour is an interesting study. Watching other people and how they behave (or not) can occupy hours & hours of our time. We have become great voyeurs of ourselves and like to compare ourselves with others and work out where we fit in (or not). Governments by nature are great to watch, especially as the media croon and fawn all over them every waking hour (or not). By such things we get to work out where we stand on issues & stuff that's going on (or down) (or not). Watching politicians is our right, as we pay for them to ponce around & pretend to be knowlegeable & busy (or not). Well, just now, we are paying a small fortune while this coalition govt stumbles, fumbles & bumbles its way through it's first 12 months in power. That's one year we'll never get back. The reality was they weren't ready to govern. Nor are they today, sadly. C'mon Jacinda & Co, get your act together girls.

Nice comment. You really had me fooled that you were going to say something insightful.

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The business community in this Country has been raised on a diet of corporate welfare, WINZ income subsidies, anti labour legislation, monopolies and cheap imported workers. This in turn has given rise to weak leadership and backward thinking businesses that simply aren't resiliant when their operational environment changes even one degree. It's shameful, in fact its a national disgrace. A stoic would say life is not linear so get used to it - and neither is business, its full of ups and downs...so get used to it. Thank goodness the research credits have been restored, they should never have been canned in the first place, now perhaps we can see creation of some forward thinking businesses from it? Gas and Oil - who cares about it? The rest of the world including the biggest producer of them all are leaving that ship en masse - in fact arguing about it just shows how backward thinking yet again the business lobby in this country is. Foreign investment...decode that carefully and it translates to someone else buying all your stuff for dirt cheap and making you pay them to use what you used to own...if you don't end up living in your car. This country needs to take control of its destiny instead of floating about with a so called safe pair of hands on the tiller.

Global concerns...china, America. A slow down will impact. NZ increasing taxes and business confidence in a slump there is little upside.

Good read David and I'm happy to sit in your corner of rate rises rather than cuts. I think Q3 next year to allow the 60% of household debt that comes up for renewal between now and then to fix itself at more favourable levels (and hopefully for longer terms). I'm sure that Mr Orr will have issued that warning to them already.

It's also a Gubmint Budget concern. Tax revenues are tied to what businesses decide to do, so if they sit on their hands and don't expand, and minimise spend, and generally hunker down, that will feed into tax receipts after a perhaps considerable lag.

That then stacks up against the calls on that revenue:

  • Large pay rises for teachers across the board
  • Free tertiary ed advancing another year each year
  • Consequential relativity disturbance: police, defence, justice etc. Small wildcat strikes are already showing up the feelz bubbling just below the surface...

Someone is going to have to have the leadership skills to explain to the teachers (ain't that a goodie?) that they lived through the most privileged era and as part of the most privileged echelon to do so.

There is no 'better from here on' - there is only a question of how 'worse', how fast. Rod Oram channels Roy Scranton's book https://reasonandmeaning.com/2018/02/18/review-of-roy-scrantons-learning... "The greatest challenge we face is a philosophical one: understanding that this civilisation is already dead. The sooner we confront our situation.............the sooner we can get down to the difficult task of adapting.........to the new reality".

I don't think Scranton rates business confidence. I'm not as pessimistic - yet - but worrying about what business folk think is not our biggest problem. And the more this Govt pander to their short-term-self-interest, the more it will render itself irrelevant.

Sorry, large corporate welfare is reducing..
Who is this “Business community”? The senior execs of the large corporate entities / duopolies / are running an anti Govt campaign as their taxpayer/consumer welfare reduces.
“The business community in this Country has been raised on a diet of corporate welfare, WINZ income subsidies, anti labour legislation, monopolies and cheap imported workers”.
However this Govt is still continuing this to some extent.

Labour always stimulates the overall economy in NZ. Seems ironic, but something every business can take comfort from. Despite all the union wage demands.
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As Bob Jones has been quoted several times.
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“It’s no secret the commercial property industry, numbering over 100,000 people in all of its ramifications, favour Labour governments simply because they like vibrant economies. As the past 40 years show, these always accompany Labour’s periods in office.

But, the stultification corresponding with National governments is welcomed by bigger players as it throws up acquisition opportunities, aside from which there’s more to voting than economic issues and dull governments never last forever.”
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So despite “Business” protestations - Labour Governments get the NZ economy going for more participants.
National just keep the status quo ticking over, while suppressing the public sector spending.
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Is NZ run for the benefit of Fonterra, Fletchers, Airnz etc? Or for all 4.6 million citizens?

When 50% of government revenue is spent on those who don't work, or don't work much - isn't it ironic that people have the idea that the producers are on welfare¿ I'm paying $20hr to anyone who looks like they can swing a shovel, but the meth heads are too busy getting munted or laying about hungover, to even bother coming up with a decent excuse why they aren't at work, let alone actually turn up. I don't know how they can afford it and the 4+ kids, but somehow government provides.
As our Red Leader has stated - these kids living in poverty are proof that capitalism has failed, it's time to usher in the new era of prosperity for all. First priority is to attack the employers!

Yes, the kulaks are always the default target.....

And 60% of those welfare benefits are handed out to people regardless of need, just for reaching age 65. We're giving benefits to people living in mansions.

And we have WFF and accommodation supplements subsidising company wage bills and property investors.

Absurd, isn't it? And our supposed right-leaning party only perpetuates these and campaigns on increasing these handouts. And they kept penalising those who work for a living while letting capital gains off the hook, despite citing the unfairness of this in their earlier campaigning. Way to discourage enterprising folk!

Sadly people always think the solution to conditions created by government policies is... more government.

At this rate by the time millennials are in the latter stages of their career, they'll be handing over 80% of what they earn to the state, but it's ok because they'll be issued state assigned sleeping capsules to live in and soylent shakes to live of off(well... when the systems don't go down they will).

As someone who was unemployed/labouring 5 year ago, could swing a shovel and wasn't on any drugs at all - there were no people at all people paying anything remotely over minimum wage that I could track down.

All I got was temp agencies, farming me out to other sites on minimum wage. And it wasn't even consistent, a 2 days here, a half day there.

How are you advertising?

Min wage is $16.50. I believe a temp agency would take at least a $3.50 per hour cut, so there is your $20+ cost to the employer (who only wants temp workers so they can get rid of people at will).

Back then min wage was ~$14 I think. But Skudiv made it sound like he was offering $20 an hour straight to the worker, so I am giving him the benefit of the doubt.

I remember doing a bit of temping when i first entered the workforce. The first couple of weeks i had work every day and then it dried up. It's like they have 10,000 temps on the books for 5000 jobs and just rotate through the temps to keep them keen.

I have a challenge for the all the critics of the Coalition Government especially The Boy who would have to be the commentator on this site who has criticized them the most. Who currently in the National caucus is capable of leading them to victory in 2020 against Jacinda? Do not bother to mention Simon Bridges as he is currently destroying himself and the party to some extent. He is so busy trying to protect his leadership one wonders whether Natiional has any policies at all. Secondly what party will National have as an ally to get them over the line? I can only see the Coalition getting at least another term of three years until National gets an ally and they get a decent leader who can get the whole caucus behind him or her.

Her name is Nicola Willis likely to be our next PM

4 kids. Claims to be blue-green. Doesn't add up.

Challenge declined. IDGAF. I’m in California with my eldest. Doing the rounds of tech companies seeing how I can help him land a techie role that will allow him to become an expat in a deep pool. There’s nothing for him in NZ except mediocrity and a lifetime of taxes supporting the indolent.

Cute. Are you cold calling or do you actually have a rapport with these tech companies?

Networking based on a small number of kiwi given contacts. Americans seem to love to help. All we need is one in and we figure making the effort to come to the US might give him the edge in seeing someone before his CV is discarded with the others.

I wish your son all the best, he's lucky to have a father that's so supportive.

Those who grasp the challenges and opportunities will prosper and those who sulk and have a negative outlook will suffer. The first rule of business is survival and if a businesses response to a perceived bit of adversity is to turn negative and inward, then they will get what they deserve. I can just imagine these delicate little over pampered wall flowers offering exactly this sort of advice to the labour force.