Getting to the heart of what business confidence means

Does low business confidence really mean the economy is in trouble?

“It depends,” says ANZ chief economist Sharon Zollner, who has tracked the history of ANZ Business Outlook survey and its correlation with GDP performance through the years.

Zollner has focused on firms’ view of their own business outlook — a measure considered more relevant to the economy than their sentiment about overall conditions.

On that measure, the correlation between the two appears strong.

She highlights slumps in 1991, 1998, 2000, 2003, 2005-6, 2008 and 2015.

Of those, some represent an obvious response to a downturn — as in 1998 after the Asian Financial crisis or in 2008 when the global financial system crashed.

“Sometimes it doesn’t really matter if business decides to keep a stiff upper lip, if a global financial crisis happens then the economy is going to slow.”

At other times it can be more of a cause with firms deferring their investment and employment decisions if they are not quite sure how things are going to pan out, she says.

For example, confidence dipped around the time of the global SARS outbreak in 2003, but apart from some disruption to travel, the issue did not cause a major slump.

“Of these instances, the 2000 ‘winter of discontent’ appears the most similar to today,” Zollner says. “The economy had rocketed out of recession but lost its mojo with the change of policy direction.

“The effects were real — firms delayed hiring and investing — but growth bounced back aggressively after troughing around 1 per cent.”

There are some key differences from today though.

Back then the RBNZ cut the OCR by 175bp (quickly reversed). It was also early in the economic cycle.

“Now, the economy is grappling with late-cycle challenges.

Capacity constraints, labour shortages, rising costs, and a softening housing market to boot. While monetary policy is still stimulatory, rate cuts are not on the agenda,” she says.

“At such times, the risks are exacerbated that we might just succeed in talking ourselves into a hole.”

Zollner says the survey itself is far from the poll of corporate CEOs it is sometimes made out to be.

“Sixty per cent of the respondents have 20 or fewer employees,” she says.

Zollner agrees that too much of the blame for business confidence may be pointed at the Government.

“There are plenty of risks offshore. The trade war poses downside risks to China and we are very exposed to China,” she says.

But she notes that frontline ANZ staff working with businesses around the country do report concerns about industrial relations policy.

“Retailers are particularly concerned about the minimum wage increases.

“Tourism and agriculture are other sectors quite exposed to that,” she says.

Change to overseas investment rules, and possible implications of those, were also raised.

Zollner says the ANZ Business Outlook survey has tended to use ANZ’s database as a starting point for reaching businesses but it is open to all New Zealand business.