What’s behind all the long faces?
Do surveys reveal a political sulk, or are there some deeper issues?
Consumers are pretty cheerful but businesses are pessimistic. What should we make of this contrast? The monthly ANZ Roy Morgan survey of consumer confidence, released last week, was at a level the bank’s chief economist Sharon Zollner called solid, and which has been bettered only rarely over the past 10 years.
“The strong labour market is supporting household incomes and various government policies are intended to provide a further boost, while at the same time strong commodity prices are boosting exporter incomes,” she said.
The quarterly Westpac McDermott Miller survey of consumer confidence strengthened last month and is in line with its long-run average.
By contrast, headline business sentiment — as monitored by both the ANZ’s Business Outlook survey and the New Zealand Institute of Economic Research’s quarterly survey of business opinion (QSBO) — plunged deep into negative territory after the general election returned a Labour-led Government to power.
But the same surveys have also reflected a stark contrast between firms’ view of the economic outlook in general, and what they say about their own activity and prospects.
And it is the latter, which after all, they know more about, that is the reliable indicator of economic growth.
In this week’s QSBO a net 9 per cent of firms, seasonally adjusted, expect the general business situation to deteriorate over the next six months but a net 15 per cent report an increase in their own trading activity over the past three months and a net 16 per cent expect it to improve over the next three months.
We have seen this pattern of gloom about the general situation but confidence about firms’ own activity before, in the mid-2000s. It may not be a coincidence that Labour was also in power then. It was also a period of brisk economic growth.
That might suggest there is an element of tribal political sulking to the current gloom.
The more charitable view would be that business sentiment is reflecting some softening in economic growth in a cycle that is getting long in the tooth, and a degree of uncertainty or wariness about policy changes.
The consensus among forecasters is that economic growth slowed to 2.9 per cent over the past (March) year from an average 3.6 per cent over the preceding three years, and that it will wobble around 3 per cent for the next three years.
As for policy uncertainty, some reregulation of the labour market will inevitably be greeted without joy by employers.
The changes in the Employment Relations Amendment Bill now before Parliament look pretty modest. The detail of plans for fair pay agreements is still awaited. The declared intention of the latter, however, is only to combat a race to the bottom in working conditions.
The current labour market is marked by a record high employment rate (the proportion of the working age population employed) and a nineyear low in the unemployment rate, albeit that nearly one in four parttimers want to and could work more hours.
But wage growth has been sluggish despite what the QSBO finds are still acute shortages of skilled and unskilled labour.
The latest visa issuance data shows that in the year to June 2107, immigration was still doing very little to relieve labour shortages in the construction sector, so a KiwiBuild visa looks like a good idea.
Retailers were the most pessimistic sector in the latest QSBO, despite reporting a decent pick-up in sales.
NZIER principal economist Christina Leung suggests that might reflect employment law changes, including a rise in the minimum wage and the abolition of the 90-day trial period, for firms with more than 20 employees.
But surely a lift in the minimum wage, along with any pick-up in wages growth in response to a tight labour market, ought to also increase the spending power of retailers’ customers, should it not?
As this column argued last week, there is a tension between the declining share of national income going to labour rather than capital on the one hand, and the tax system’s heavy reliance on taxing labour income, first when earned and then when spent, on the other.
The Government has promised, however, that any changes flowing from the Cullen tax review now under way will be put to voters at the next election, still two-and-a-half-years away.
In the meantime, raising Working for Families tax credits, while pushing out the bright line test for property investors’ capital gains and ring-fencing their tax losses, should at the margin transfer income from those with a lower to a higher propensity to spend it.
Negative business confidence only really matters if it flows through to less hiring and investment.
Hiring, both reported and expected, softened in this week’s QSBO but remains in positive territory and above the long-run trend.
Intentions to invest in plant and machinery, which had dropped in the previous survey, rebounded to a net 17 per cent positive. But firms need to follow through on those intentions and there has been a tendency, Leung said, for surveyed intentions to promise more than the actual business investment recorded in the national accounts delivered.
The QSBO’s inflation indicators look reasonably benign.
A net 21 per cent of firms say they intend to increase their selling prices. BNZ economist Craig Ebert says that level is consistent with an inflation rate around the centre of the Reserve Bank’s 1 to 3 per cent target.
But among the financial services firms surveyed, a net 30 per cent now expect interest rates to rise over the next 12 months, up from 13 per cent in previous survey.
That may reflect the fact that we are in a strange world where the spread between New Zealand and United States wholesale interest rates has collapsed to zero. That’s whether you look at the short end, where our official cash rate and the US Fed funds rate are both 1.75 per cent, or 10-year government bond yields, in both cases trading around 2.8 per cent. Normally, a substantial interest rate differential is needed to underpin the kiwi dollar and keep a lid on tradeables inflation.
The present combination of a firm kiwi and level-pegging interest rates does not look durable.
Negative business confidence only really matters if it flows through to less hiring and investment