Business blues

Business confidence indicators have picked up over recentmonths, and are now well ahead of the lows reached at the end of 2005.   Butdespite these gains they remain in negative territory. In fact both the NZIER’sand the National Bank’s business confidence measures have been in the red since2002 – a period which the economy has grown at above average growth rates forthe majority of the time.   So what gives?   Business confidence measures aresupposed to provide insight into future economic prospects, but for some reasonbusinesses have expressed a pessimistic outlook throughout one of the bestperiods of economic growth in New Zealand’s history.   Are these guys neversatisfied?

Interestingly survey responses about business expectationsfor their own business provide a far better steer on future economicprospects.   So business leaders do know what is happening, but something isdistorting their perspective about the economy as a whole.   One hypothesis isthat politics colours business perspectives.

To test this we examined data from the NZIER’s QuarterlySurvey of Business Opinion going right back to the June quarter of 1961.  Controlling for variations in economic activity (the survey’s building andmanufacturing capacity utilisation reading was used as a proxy for demand) aswell as one-off shocks, our analysis shows that business confidence was onaverage 20 points higher when a National led government held office[1].  That is, irrespective of actual economic conditions[2],the NZIER measure of business confidence is on average 20 points lower under aLabour led government than with National.

The analysis also highlighted four events that had longlasting impacts on business confidence in New Zealand (irrespective of whichpolitical party was in power):

  • the 1974oil shocks caused a sustained fall in business confidence of 47 points (Labourgovernment);
  • emergingfrom the recession of the late 1980’s lifted confidence by 45 points in 1992(National government);
  • the Asiancrisis of 1998 caused confidence to plummet 45 points (National government);
  • thecombined effects of the sharp depreciation of the New Zealand dollar and thebeginnings of the current housing boom lifted confidence by 48 points in 2002(Labour government).

Interestingly, business confidence also appears to lift,albeit minimally, six months out from an election.   This is somewhat counter tothe effect one would normally expect i.e. that the uncertainty created by anelection would suppress business sentiment, but may reflect one or acombination of the following factors:

  • a changein government is expected and this is viewed positively;
  • no changein government is expected and this is view positively;
  • as theelection date draws closer the result becomes more certain.

It would appear then that business confidence indictorsare influenced by the political leanings of business leaders.   The presence ofa National led government at the time the survey is taken has a positive impacton business confidence.   Conversely the economic prospects during a labour ledgovernment need to be considerably higher to induce a confident outlook fromthe business community.


[1] Asindicted in the graph below, business confidence ranged between positive andnegative 80 during the sample period.

[2] Using lags,we controlled for past present and future capacity utilisation and found therelationship between business confidence and the government held in all threecases.

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