Glum today, cheerful tomorrow
Despite the latest survey of business confidence, there are good reasons for optimism about the year ahead
Glum seems to be the state of business sentiment here and now. At least that is what the latest NZIER quarterly survey of business opinion (QSBO) would suggest.
But other indicators provide a more cheerful view.
The QSBO’s measure of firms’ own trading activity found a net 11 per cent reporting a fall in the last three months of 2019, when the long-run average for that indicator is a net 11 per cent recording an increase.
That implies an economy suffering from soft demand and would be consistent, the institute tells us, with annual gross domestic product growth of a scant 1 per cent.
But that particular indicator was just as weak in the September quarter when GDP actually rose 0.7 per cent, making 2.3 per cent for the year. The survey’s domestic trading activity readings have proven weaker than GDP outcomes for about a year now, even if historically they have been a pretty reliable indicator.
In any case, looking forward, indicators of household incomes and wealth — important for firms chasing the consumer’s dollar — are looking better than they have done, as is the international environment. Nor can the prospect of some loosening of the Government’s purse strings in this election year be ruled out.
The labour market is tight. Demand for labour has been growing fast enough to absorb an historically strong sustained increase in the labour force from net migration, while the participation rate has remained above 70 per cent. The “prime age” employment rate — the share of people aged between 15 and 64 who are employed — is 77.4 per cent, a rate exceeded by only four of 36 OECD countries.
For at least the past year, the QSBO has been showing a marked gap between firms’ employment intentions (for the next three months) and reported outcomes (headcount changes over the past three months).
That gap indicates widespread and persistent difficulty finding the people employers need. And the survey’s measure of the ease of finding skilled labour in particular is deep in negative territory.
When about two-thirds of the increase in the labour force is coming from the airport rather than out of NZ schools and universities, the Immigration Minister should be in the gun over the skills gap.
One consequence of a tight labour market is that we are seeing, at last, some decent wage growth. In the year ended last September, private sector ordinary-time hourly earnings rose 3.9 per cent. Add in the public sector and overtime and the increase was 4.2 per cent, up from 2.9 per cent in the September 2018 year and 2.2 per cent the year before that.
While this rate of wage inflation no doubt contributes to the squeeze on profitability the QSBO discerns, rising household incomes are positive for consumer-facing businesses’ top line. One firm’s employees are other firms’ customers.
Meanwhile, the lagged effects of last year’s official cash rate cuts should be felt this year.
One of the main ways they will be felt is to push up house prices, making the two-thirds of households that are owner-occupiers feel wealthier and more inclined to spend some of their increased equity.
Whether lower interest rates will encourage business to invest more, as the Reserve Bank hopes, is more debatable.
The QSBO found a net 3 per cent of firms saying they expect to spend less on plant and machinery over the next 12 months than they did over the past 12 months.
But that caution is not related to the cost of borrowing — and with interest rates at historic lows, it would be odd if it was. Only 4 per cent of firms cite finance as the factor most limiting their ability to lift turnover.
It is worth noting, however, that the QSBO does not directly survey the agriculture sector. If it did, that 4 per cent would almost certainly be higher.
So let’s assume businesses’ caution on investment reflects uncertainty driven by the news flow, domestic and international.
The latter ought to improve. There is a truce, at least, in the trade war between the United States and China.
More broadly, the OECD compiles composite leading indicators of economic momentum for its own members and the major emerging markets. The latest set, released this week, show growth stabilising in most advanced economies and China, albeit at a lower level than in the past.
New Zealand, meanwhile, is enjoying an exceptionally favourable mix of export and import prices. The terms of trade have been more favourable than this only once since the 1950s. That was two years ago.
The ANZ commodity price index rose 12.9 per cent in New Zealand dollar terms over the course of 2019 and Fonterra is forecasting a payout of $7 a kilogram or better for the current season.
Domestically, a key source of uncertainty relates to fiscal policy.
The construction sector in particular will be keenly awaiting more details on the composition and timing of the increase in infrastructure spending the Government foreshadowed last month.
And as far as its operating expenditure and the modest $900 million deficit now forecast for the current year are concerned, it is worth noting that a week after the Treasury closed off its forecasts for tax revenue, Statistics NZ released national accounts which revised upward by just over $4 billion the level of nominal GDP — a proxy for the tax base — at the start of the current year.
So the forecast deficit might not eventuate. And even if it does, given how low Government debt is by international standards and how cheaply it can borrow, there is no fiscal excuse for May’s Budget failing to address the social deficit it inherited.
Altogether it suggests a happier New Year than the QSBO would imply.
One consequence of a tight labour market is that we are seeing, at last, some decent wage growth