Headline business confidence may not be only worry
When Jacinda Ardern was quizzed about the latest fall in business confidence yesterday, the Prime Minister was quick to separate “opinion surveys” from “hard data”.
Ardern hinted that general business confidence had a political flavour.
“When it comes to business confidence, I’d point out that even when we were at 3 per cent growth over the last Labour Government 80 per cent of the time, we had some pretty negative business confidence,” Ardern told Radio New Zealand.
She is right, as even the organisation which publishes New Zealand’s leading business confidence surveys acknowledged.
Last year the New Zealand Institute of Economic Research (NZIER), which has been undertaking the quarterly survey of business opinion (QSBO) since 1961, released charts illustrating the point.
Under Helen Clark’s Labour Government, general business confidence was consistently weaker than domestic trading, while under John Key’s National Government, it was often higher.
As soon as Labour returned to office in 2017, the gap between trading and sentiment ballooned once again.
But although headline business confidence appears to be influenced by political factors, other elements are not. General business confidence is a simple measure, where survey respondents are simply asked how they believe the New Zealand economy will generally perform over the coming year. According to recent surveys, the measure is at the lowest level in around a decade. But perhaps that does not matter.
While the headline figure often gets the most attention, it is not the one that economists focus on.
Christina Leung, principal economist at NZIER, said a far better indicator of how the economy will perform is the “own activity” measure, where businesses are asked whether they have seen an increase or decrease in activity in their own operations over the previous quarter.
The reason for this is simple. While businesses may become very positive (or very negative) about the overall economy based on little evidence, they should have a very accurate idea of whether they are seeing more sales or less.
According to Leung, when it comes to how well ‘own activity’ tracks future economic growth “you can barely see the difference” between when National or Labour are governing.
In terms of own activity, the figures are not as bad as headline business confidence, but the message economists take from it is arguably worse. A net 11 per cent of businesses reported demand fell over the past quarter in the latest QSBO, the worst reading since 2010.
“What it does suggest is that annual [economic growth] will ease to below 1 per cent later this year,” Leung said.
Other indicators are also worrying, with businesses saying they expect to invest less in both buildings as well as new equipment.
Clearly, not all of this can be sheeted home to the Government.
Ardern said yesterday that not only was economic growth at its longrun average, New Zealand was growing faster than the countries we tend to compare ourselves to, most notably Australia.
National’s Paul Goldsmith said Ardern was “in denial about the real state of the economy” pointing out that growth per capita (which strips out population growth) was already well below 1 per cent.
Politics aside, a growing number of economists are warning that with interest rates already at record lows, the economy need stimulus from the Government.
Kiwibank chief economist Jarrod Kerr said the Government had so far been reluctant to spend in order to stay within its budget responsibility rules, to reduce debt as a share of the economy, a move which had proven to be irresponsible as the economy lost momentum.
“The ‘wait and see’ approach is now ‘late and see’,” Kerr wrote.