From The Beach 2009
Businesses are running scared. The first major New Zealand economic news for 2009 has seen the NZIER’s measure of business confidence plummet to its lowest level since at least 1970. Confidence can be a nebulous beast, but measures of activity experienced in the last three months have also fallen sharply. More specific questions also add substance to the pessimism. Profitability expectations are the worst since 1982, and a wide range of other indicators from the survey are at their lowest since the early 1990s recession.
If forecasts of economic growth (both domestically and internationally) are to be believed, the pessimism is justified. Consensus forecasts of New Zealand’s GDP growth for 2009 have been revised down by 2.1 percentage points over the last four months. Forecasts for world growth have been slashed by even more, and with the speed that events unfolded over the last few months of 2008, it is highly unlikely that the downward revisions have finished yet.
Graph 1
The next 12-18 months shape as "survival mode" for businesses, no matter whether they’re domestically or export focused. For many firms, most of 2008 was spent in a sort of holding pattern in the hope that the domestic slowdown would start to be counterbalanced by a pick-up in spending underpinned by strong export incomes. That relatively benign scenario is no longer going to happen. Maintaining the holding pattern throughout the rest of this year is not an option, and many firms will be forced to adopt more aggressive measures to ensure that they are still around by 2010.
The most obvious area of rationalisation is staff numbers. The increasingly tight labour market throughout most of this decade meant that, even as the economy has slowed down since 2006, firms held on to staff more tightly than normal. But more drastic action now needs to be taken, as reducing worker hours simply won’t be enough.
Although they tend to capture the headlines, the bulk of the job losses won’t occur in large-scale layoffs or closures. Instead, we’re likely to see large numbers of part-time jobs disappearing. Expect unemployment to top 6% (if not 7%) by the end of this year.
Some firms will take the opportunity to run the ruler over underperforming business units that have been allowed to continue operating while economic conditions have been more favourable. If times are tough, then there’s no point having the profitable sections of the company dragged under by ill-conceived albatrosses (or Ferrits!). As the old song goes, "do what you do do well". Expansion plans are also likely to be put on ice as firms become nervous about investing and additional credit and capital remain hard to come by.
For the first time in a decade, businesses expect to lower their prices next quarter. Although cost pressures are expected to be at their lowest in five years, profitability will still be squeezed and firms will be looking to eliminate other costs where possible. Eradicating excessive costs is a valid business strategy in any downturn, and is a discipline that is not necessarily maintained during periods of strong demand. Ultimately, though, cost reduction is a stopgap measure for survival – costs can only be driven down so far, and expanding revenue is the key to ensuring a business’s success over the medium-term. Firms need to be alert to any improvement in the economic environment and stand ready to react to those more favourable conditions.
In other words, being well-informed is a key for businesses to be able to take advantage of the next upturn. The following is a list of data series that we believe will provide good leads on the near-term prospects for the economy. They are all very partial indicators, selected for their timeliness in highlighting different facets of the downturn that is currently affecting the New Zealand economy.
- Indications that the Chinese economy has hit the wall are less than welcome. The figures that are perhaps least open to manipulation are China‘s electricity production, where three-month annual growth has slowed from 16% in April to -2% by November. Keep an eye on these numbers as a good indicator of broader demand for our exports from the Asian bloc.
- Given that it remains our largest export market, retail sales in Australia provide an important insight into household spending trends across the Tasman. Sales volume growth has dipped from 5.8% to 0.8%pa since the end of 2007, and with consumer confidence in recent month shaving dipped to its lowest level since 1992, further weakness is likely in the near term.
- Inextricably linked to the health or otherwise of our export markets are international commodity prices. ANZ’s commodity price indices provide a timely indicator of what income prospects for our exporters (and farmers, in particular) are looking like. At this stage, commodity prices in world terms are down 27% from their peak in July, but exporters have been partially sheltered by the falling currency – New Zealand dollar returns have declined 6.2% over the same period.
- Seized international financial markets have reduced the availability of credit. With banks being more selective about their lending and concentrating on increasing margins, financing costs for businesses have been kept at high levels. Although wholesale credit spreads in New Zealand eased significantly in early November, a renewed upward trend has developed since Christmas – even as American spreads have continued to close. Some semblance of normality is necessary on credit markets before any recovery in business investment can be entertained, but credit spreads are still 100-150basis points larger than the levels prevailing before mid-2007.
- With 76% of household wealth tied up in housing, property prices have an unquestionable effect on consumer confidence and spending decisions. Any signs of an improvement in housing market sentiment (house salesare likely to be the earliest indicator) would be positive for the chances of a pick-up in domestic spending. Even if consumers maintain a conservative approach to spending, the flow-on effects for the residential construction sector would be more than welcome.
- The NZIER’s measure of expected domestic trading activityfrom the Quarterly Survey of Business Opinion has a well-established relationship with GDP, providing a two-quarter lead on economic growth. It is very rare for this data series to indicate a "false dawn", and at the moment it’s more than twice as bad as the previous record low of 1982.
- For completeness’ sake, we’ve included a labour market indicator – employment confidence from Westpac’s survey. Given the survey’s only been going since 2004, we’re not entirely sure how much genuine information the survey provides, but it’s potentially more of a lead indicator any other labour market figures (wages, employment, etc), which all tend to lag real economic activity.
We have posted these indicators on our website at Economic indicators, and will be updating the graphs regularly over coming months to keep clients abreast of the latest developments.
