Rubber of weak business confidence hits the road

There are plenty of anecdotes which show how hot the economy has been running in recent years, but my most memorable is from Rimutaka Prison. Late in 2018, as I prepared to report on the parole hearing of a noted white-collar criminal, I watched the Parole Board consider the pleas of another prisoner, a persistent but generally non-violent offender.

The gentleman, in his 40s, was upfront about his lengthy string of dishonesty convictions, which he linked to his ongoing battles with drugs. Despite the problems, he was confident about his employment prospects if he was released and could stay sober, simply because he had a driver’s licence.

A charity worker supporting his attempts to adjust to life on the outside had told him – and later confirmed to me – that if he could pass a drug test and turn up on time each day, there were a string of civil engineering companies who would be happy to employ him on Transmission Gully, the massive road project north of Wellington.

As well as the number of businesses putting signs in their windows appealing for workers, this is a sign of what happens when unemployment falls close to 4 per cent, a level where economists generally say you have full employment. Employers look in places where they might not have been willing to look before. In a world where we are told that workers need to adapt to a changing world, even those without specialist skills are able to find work. (It is also an argument as to why the Government would have been wrong to accede to calls to stimulate the economy further – there simply have not been the bodies to do the work.)

To some, this might only seem fair; they might also point to spiralling rents or other cost-of-living pressures to show that the economy is not delivering for all. But anyone who can remember double-digit unemployment of the 80s and 90s knows the current conditions should not be taken for granted.

Whatever else is happening, life will be easier for most people in a country where jobs are plentiful. These conditions may be passing. Although unemployment is still low, figures from Statistics New Zealand showed that, in the six months to the

end of March, the number of jobs in the economy fell marginally. Although the drop was small, it is clear that job creation has slowed.

For all of the debates about ‘‘junk’’ surveys and political bias since the 2017 election, this is the rubber of weak business confidence hitting the road. Worse could be ahead.

The latest Quarterly Survey of Business Opinion (QSBO) paints a grim picture of the months ahead, prompting warnings the Government spendingfuelled bounceback expected in the second half of the year may not be as strong as expected.

The Institute of Economic Research is quick to point out that headline business confidence in its survey is highly political, tied closely to the government of the day. But the survey is much more accurate when it comes to what respondents say about how their own businesses are performing. By this measure, the share of businesses warning that activity is expected to contract exceeded those expecting an increase, for the first time in a decade.

BNZ warned this could imply growth falling to about 1 per cent, below the speed at which the population is increasing.

National has pointed repeatedly to the fact that New Zealand’s terms of trade – a measure of export prices – are at levels that would usually point to a boom time, as it attempts to pin blame at the feet of the Government.

The accounts look healthy, but part of the reason is that the coalition is struggling to get its ambitious spending plans off the ground.

But there are legitimate reasons to fear what is happening overseas, because ultimately New Zealand’s fortunes are so largely set by what is happening elsewhere. Australia’s economy is slowing faster than our own, with growth in the ‘‘lucky country’’ now at the lowest since the global financial crisis.

In the United States, according to the New York Federal Reserve, bond prices at the start of June suggested there was a 29 per cent chance of a recession in the next 12 months. Those odds may not look extreme, but the last time the measure reached that level without a recession following was in the 1960s.

Our own Reserve Bank is already cutting interest rates, but with the official cash rate at a record low, there is a limit to what more will achieve.

The Government’s accounts look surprisingly healthy, but part of the reason is that the coalition is struggling to get its ambitious spending plans off the ground. Much has been made of the degree of fiscal headroom the Government has, with debt low compared with many of New Zealand’s peers.

Given how long it takes to get projects consented, it would be wise for the Government to push ahead with consenting major infrastructure projects now, so when conditions get worse it is ready to create demand.