Business sentiment out of line with reality
Opinion (New Zealand)
It's time for a reality check
Business sentiment out of line with reality
The latest NBNZ business survey showed the sharpest fall in business confidence in 12 years, back to the level recorded during the 1998 recession. While there is good reason for business sentiment to be less positive than during the rapid growth period in 1999, the massive fall in confidence over recent months appears completely overdone and out of line with underlying economic fundamentals. That is supported by the large gap that has opened up between business people's optimism with respect to their own prospects and the level of general confidence. The latter supposedly includes an assessment of the economy as a whole. The gap implies that individual businesses have an unduly pessimistic perception of the prospects for the rest of the business sector - a clear indication of general sentiment getting out of line with reality.
Unlike today, in 1998 there was good reason to be depressed
The extent to which current pessimism is overdone becomes apparent when the current situation is compared with the 1998 recession:
* In 1998 world growth was suffering from the Asian crisis and its flow- on effects. Forecasts for 2000 show one of the strongest world growth performances over the past 10 years.
* In early 1998 prices received for New Zealand's export commodities were around 20% lower than today.
* In 1998 the agricultural sector suffered from a severe drought. In 2000, good growing conditions and rising prices imply the strongest increase in farm incomes for a decade.
* In early 1998, New Zealand's cash rate averaged 8.7%. It is currently at 6.5%.
Bottomline: In 1998 businesses had good reason to be depressed. The case for the current level of pessimism is less obvious.
Government policies are clearly unfavourable - but is that the end of the world?
Government policy is usually quoted as the main culprit. We readily agree that the Government's agenda so far can hardly be called business friendly. But does that justify such a degree of overall pessimism? The Employment Relations Bill is a clear step backwards and the threat of rising business costs is very real. But is that going to be the end of the world, particularly considering the Government's newly-found willingness to take concerns more seriously? The re-nationalisation of the accident compensation insurance appears to be driven more by ideology than sound economic or financial considerations. But again, is that going to be the end of the world, particularly considering the fact that the Government seems determined to prevent a renewed rise in average premiums?
Other factors seen as driving the current pessimism include: Interest rates. While they have risen, interest rates are still at comparatively modest levels compared to the last cycle. Part of the reason for the significant tightening over the past six months has been the fact that, prior to the tightening, rates had fallen to their lowest levels in decades. A possible end to the upturn in world growth. The world growth cycle may be at its peak, but that does hardly mean that the world is about to experience a recession. World growth may slow to 3.5% in 2001 instead of 4.0-4.5% in 2000. Rising costs related to a weak exchange rate. This is clearly a significant problem, which puts pressure on profitability of those companies that do not have a natural hedge in terms higher export incomes on the back of the weaker NZD.
What about the positives out there?
The agricultural sector is doing extremely well, helped by excellent price and volume growth. The dairy sector is looking forward to a 20% pay-out increase for the coming season after a significant increase this year. Farm income growth will affect demand in the regional centres in particular.
The tourism sector continues to record double-digit growth rate. The number of tourists in April was up 18% on a year earlier.
The weak NZD and prospects of only a modest recovery over coming years will continue to be supportive of the export sector in general.
The weak NZD also improves the competitiveness of the domestic sector relative to overseas suppliers.
The strong underlying fiscal situation will allow the Government to spend significantly more over coming years - partly on business development initiatives - and still generate rising budget surpluses. Increased government spending will, directly or indirectly, support domestic demand.
In summary, business conditions may not be ideal - for some companies more so than for others, depending on the particular sector. And it quite clear that the Government's policy agenda so far has had little positive to offer to the business sector in general. However, things should be kept in perspective. There are a lot of positives out there and the negatives do not justify the current low level of confidence. The latter appears consistent with the expectation that the economy will go into recession over the next 12 months. Unfortunately, the excessively negative sentiment has the potential to develop its own dynamics and generate a downward spiral in activity that is completely out of line with underlying positive fundamentals for the economy - like strong world growth and a very competitive exchange rate. The adverse effects of such a downward spiral on growth and business conditions has the potential to be significantly stronger than those associated with the dreaded Government policy changes. It would be a shame if New Zealand businesses, in conjunction with the media, talked themselves into a sharp economic downturn only two years after the last recession.
Ulf Schoefisch, Chief Economist,
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