Warning to the Reserve Bank: Most small Auckland firms expect times to get tougher in the year ahead – perhaps significantly so.
PJ Asar is preparing to reopen his barber shop on Auckland’s Victoria St, after an unwelcome three-month break.
He and his staff Alex and Matt are fully vaccinated; they’ve got through this with the help of the Government’s wage subsidy, and established customers who phoned Asar in lockdown. “PJ, I’ll pay for a haircut now,” they would say. “And after lockdown I’ll come in and have it then.”
His small business RightCuts is down $12,000 in the past months. He has rates and insurance bills outstanding. But today’s he’s again taking bookings, and he feels lucky. There’s a barber shop over in High St that has closed for good, after 25 years. “I survived, but there are many who haven’t survived.”
At business accounting software firm MYOB, Jo Tozer has been watching the impact of Delta and lockdowns on business. She has seen the negative effects of the prolonged lockdown in Auckland on small and medium enterprises – and that’s why she is calling for interest rates to remain on hold.
Ahead of the Reserve Bank’s monetary policy statement this week, hers is one of a few voices calling out against the tide. Most economists and financial leaders are predicting the Bank will hike interest rates 0.25 percent, perhaps even 0.5 percent. And they support that step.
But almost alone on the NZ Institute of Economic Research shadow board, Tozer is asking the Bank to delay any further rise. The latest MYOB Economic Snapshot found that 55 percent of local SMEs expect the economy to decline in the next 12 months, with almost a quarter (24%) expecting that decline to be significant.
“Growing financial pressures on local businesses – including supply costs, operational and production costs, and the increases in the minimum wage – are expected to be soon passed onto customers through price increases as SMEs continue to look for some relief.”
– Jo Tozer, MYOB
And 48 percent of SMEs surveyed reported their revenues were down on a year ago. “In this environment, constraining monetary policy that will increase the cost of finance for small businesses – many of which depend on financing through home mortgages and credit cards – will create additional pressure on an already stressed sector of the economy,” she said.
The pressure to increase interest rates is driven by rising inflation, but Tozer said that was not a significant concern for SMEs at the moment. Just 15 percent said it was having an impact on their confidence, though it would likely be a different story in 2022.
“Our insights show that growing financial pressures on local businesses – including supply costs, operational and production costs, and the increases in the minimum wage – are expected to be soon passed onto customers through price increases as SMEs continue to look for some relief,” Tozer said.
“MYOB’s recent survey of more than 500 local SMEs revealed that 44 percent of SMEs will raise their prices over the next six months, including 56 percent of construction sector businesses and 54 percent of those in manufacturing.”
Broadly, New Zealand finance markets and leaders are preparing for a rates rise. The NZX50 fell 132 points on Monday, on turnover of $146 million.
“Ironically, the various current states of lockdowns are exacerbating supply chain issues which will continue to persist until borders are fully open. Given supply constraints domestically (and internationally), the demand for labour is likely to increase, further putting sustained pressures on wage rates. Inflationary pressures are likely to persist well beyond previous expectations.”
– Kirk Hope, Business NZ
Western Union currency strategist Steven Dooley said market expectations of seven rate hikes over the next 11 months seemed excessive, though. “This follows a broad theme across the globe – markets see many more rate hikes than central banks forecast,” he said. “This tension between markets and central banks will be a key theme in 2022.
“While the Reserve Bank is likely to hike on Wednesday, they are also likely to signal they will tighten in line with market expectations.”
The remaining members of the NZ Institute of Economic Research shadow board backed a tightening in monetary policy this week, primarily through higher interest rates, and all including Tozer agreed monetary policy would need to tighten next year.
“Costs are rising, but robust demand has allowed businesses to pass higher costs onto customers by raising prices,” they said.
“Extremely loose monetary policy has encouraged borrowing and pushed up asset prices, including housing. Although there remains some uncertainty over how the Covid-19 outbreak will evolve, the risk of these intense inflation pressures becoming entrenched and persisting throughout the years underpins the shadow board’s calls for a tightening in monetary policy.”
“The problem is some of us are so stubborn about winning. We have to accept that this is going to be part of our life. We must find new ways to operate.”
– PJ Asar, RightCuts
Business NZ chief executive Kirk Hope said inflationary pressures were continuing to rise and, if anything, were likely to persist for a significant period of time. “Given that both inflation is outside the Reserve Bank’s target band and employment is at (or in breach of) maximum sustainable employment, the Reserve Bank needs to move rates up towards more neutral levels soon; otherwise, there is a risk of having to go harder and faster,” he said.
“Ironically, the various current states of lockdowns are exacerbating supply chain issues which will continue to persist until borders are fully open. Given supply constraints domestically (and internationally), the demand for labour is likely to increase, further putting sustained pressures on wage rates. Inflationary pressures are likely to persist well beyond previous expectations.”
Kiwibank chief economist Jarrod Kerr said New Zealand had seen an incredible run of economic data. “Inflation is running a lot hotter than forecast, and the labour market is much tighter. Wages are rising. Another 25bp hike is more than justified.”
Alongside those businesses operators in the MYOB survey, PJ Asar is dubious about talk of a bounce-back like last year’s one. This lockdown is too long, too deep. It will be a long time before workers feel confident to return to city streets – so service providers will have to adapt to a new reality with Delta.
“We don’t have to always win,” Asar muses. “The problem is some of us are so stubborn about winning. We have to accept that this is going to be part of our life. We must find new ways to operate.”
