Business confidence fell to a five year low as winter began and it wasn’t just because managers were politically biased. Bernard Hickey argues it’s time the Government reacted to this cooling with a debt-funded construction stimulus and interest rate cuts.
Comment: Until the last week, Finance Minister Grant Robertson could successfully argue that the slump in headline business confidence since the election had more to do with the political biases of the respondents than their actual experiences as business managers, or the predictive power of the surveys for GDP growth.
But two business confidence surveys seen over the last week should be ringing alarm bells for both the Government and the Reserve Bank. They show the actual experiences of the managers fell back to multi-year lows as the winter began, suggesting growth is slowing towards two percent from the levels over three percent that both Treasury and the Reserve Bank were forecasting in May.
Business confidence has deteriorated for a variety of reasons beyond the Government’s control, including staff shortages and rising costs in construction. But one or two factors were caused by the coalition Government’s actions, including the planned 25 percent hike in the minimum wage and a long period of uncertainty over migration policy for construction workers.
It’s about time Robertson, Prime Minister Jacinda Ardern, acting Prime Minister Winston Peters and new Reserve Bank Governor Adrian Orr revisited their approach to both the Government’s 20 percent debt target and the outlook for flat interest rates. A construction spending stimulus funded by Government borrowing and a Reserve Bank rate cut should now be considered.
It’s been building for a few months, but now the evidence is clear.
The New Zealand Institute of Economic Research’s (NZIER) closely-watched survey of business opinion was released on Tuesday and found confidence about firms’ ‘own activity’ fell to a five year low in the June quarter, NZIER’s economists said indicated the economy would slow towards two percent through the second half of 2018.
The NZIER survey confirms a slide seen in recent months in the ANZ monthly survey for both confidence about the wider economy and ‘own activity’.
The wider business confidence figure is more closely correlated to which type of Government is in power than GDP, but the ‘own activity’ measure is a more reliable leading indicator of GDP growth. This result confirms the concerns about weak business confidence are more than just political bias.
The survey of seasonally adjusted experienced domestic trading activity found a net seven percent saw improvement, down from 15 percent the previous quarter to the lowest level since 2013. Expectations for own activity in the next three months also deteriorated, falling to a net 13 percent from a net 16 percent, which was the lowest since 2016.
Confidence about the general business situation fell to a net 19 percent negative from a net 10 percent negative in the March quarter. This was the lowest level since 2011, but is much more affected by political bias and is not followed as closely by economists as the own activity measures.
Minimum wage hikes a factor
NZIER reported profitability expectations fell sharply, particularly in retail and construction because of rising cost pressures from wages and shortages of workers and materials. The Government’s plan to increase the minimum wage by more than 20 percent over the next three years and cost pressures in construction were cited. Retail sector profitability expectations fell to their lowest level since March 2009.
A net four percent of businesses expected to reduce investment in buildings, the lowest level since December 2011 despite residential and commercial construction being near record highs and the Government promising to ramp up KiwiBuild and infrastructure investment. Many report slumps in profitability and Fletcher Building’s heavy losses on big projects is an indication of the problems some are having controlling costs. Fletcher’s decision to pull out of vertical construction has also hammered confidence.
Architects’ work in commercial and Government construction fell to a seven year low. This seems counter-intuitive, given the $100 billion pipeline of infrastructure work identified over the next decade by Treasury, but that is no bigger than under the previous Government. The Government has promised $42 billion of capital spending in coming years, which it argues is $10 billion more than the previous Government, but most of that is increased contributions to the New Zealand Superannuation fund.
The Government’s 20 percent net debt target, which is the same as the previous Government’s target, is constraining the Government’s response to a five percent population increase over the last three years that is straining transport, hospital and schooling infrastructure to breaking point, particularly in the top half of the North Island.
The fall in actual activity business confidence has already increased financial market expectations that the next move in interest rates is likely to be down. Mortgage rates have been trimmed in recent days as data continues to show a weakening economy and very low inflation, while the New Zealand dollar has fallen to fresh two-year lows, although turmoil on emerging markets is a factor there too.
‘It’s still political’
Robertson struggled yesterday to respond to the change in experienced own activity for businesses, falling back on the argument about political bias, which is now mostly redundant.
“We’re going to continue to work with the business community,” Robertson told reporters in Parliament yesterday.
“You’ve got to remember the economy is in pretty good shape. We’ve got surpluses. Unemployment is low and growth is going forward in a sustainable way,” he said.
“Business sentiment is often negative when there is a Labour-led Government. Employee confidence is good, consumer confidence is solid, and we’ve got to continue to look at the fundamentals of our economy.”
Robertson remained hopeful the $5.5 billion families package would boost growth, however that is already baked into expectations.
He rebuffed questions yesterday about the need for fiscal stimulus.
The real question is whether the Government can afford to hold on to its 20 percent debt target, or whether it considers ditching what has become an anchor. The Reserve Bank’s forecasts of flat interest rates for the next year or two also look out of date. A cut, or at least a change in bias towards easing, is now in order.