Living with uncertainty
Businesses are testing which way the winds of the economy are blowing, Cameron Bagrie writes.
’’The economy is not booming; it’s doing enough to get by.’’
Uncertainty promotes caution. A fisherman is less likely to go out when the weather is dicey. You don’t (or shouldn’t) set off on a trek to climb a mountain when the weather forecast is iffy.
Investors shun peripheral assets in times of high volatility or uncertainty. Companies don’t invest.
High levels of uncertainty – which we have now – could be bad for growth, investment, incomes, tax revenue and the ability to redistribute the economic spoils. If sustained, the current uncertainty will have an impact.
Uncertainty rose when Labour was last in power. Investment held up, nonetheless. Back then though, the economy was midcycle and building momentum, and asset prices were rising faster than the replacement cost.
All are big drivers of investment behaviour. Now the economy is late cycle, growth is ho-hum and asset prices are flattening out but costs are not. The uncertainty channel could have a real impact.
Economic direction is changing. We have certainty about that. Some of it is welcome. Some serious social and economic deficits need addressed.
Some changes don’t appear well-thought out though, and this is clouding the picture.
The challenges associated with the proposed shifts in migration, housing, labour relations policy and restrictions on foreign ownership are now being exposed.
Where will the chippies come from? If we are less receptive to receiving foreign capital (which is needed to fund our investment needs), where is the local savings pool to pay for the housing developments?
New Zealand is at a critical juncture of the business cycle and economic expansion. We are facing late cycle challenges, as opposed to early cycle ones.
Early cycle challenges are all about getting growth and sales. Getting the economy moving.
Late cycle challenges are about meeting growth. It’s about maintaining momentum after momentum has been achieved. That’s where investment in productive capacity is critical.
Unfortunately, uncertainty is the enemy of such investment.
When uncertainty is high, businesses tend to defer and exercise the time value option of waiting. In rugby scrummaging parlance, there is more of a crouch before you engage.
Business confidence took a big hit in late 2017. It’s recovered but a net 20 per cent of firms are still downbeat about the economic climate, according to the monthly ANZ business outlook survey.
That means pessimists outnumber optimists, by a considerable margin.
Comparisons are being made with the winter of discontent of 2000. Business confidence back then fell off a cliff. By mid-year a net 56 per cent of firms were downbeat, according to the same ANZ survey.
That was a crisis in confidence. The good news for the Government and the economy is that we are nowhere near those levels.
The bad news is that the weakness in confidence in 2000 could be blamed on other factors beyond policy uncertainty. The Reserve Bank hiked interest rates by 2 per centage points in six months in 2000.
That knocked the stuffing out of the interest-sensitive parts of the economy.
Offshore, technology stocks on the Nasdaq were crashing, as the dot-com bubble burst. Throw in some new Government uncertainty and confidence plummeted.
Those contributing factors are absent this time around so the finger can be squarely pointed at uncertainty surrounding Government policy (though share prices have started to wobble of late).
Thankfully, business confidence is a poor indicator of growth prospects. It can largely be ignored.
We focus more on what business figures think about prospects for their own firm, which is more politically agnostic and closely correlated to gross domestic product.
High levels of uncertainty did not derail business investment from 2000 to 2007. Firms just got on with it.
The hope is that the same occurs this time around. Conditions are more delicate now, though.
The economy is not booming; it’s doing enough to get by. Asset price growth is flattening out but replacement costs are still rising.
With this background, business investment is vulnerable to added uncertainty, and the impact could be very real.