From The Beach 2009

Businesses are running scared.   The firstmajor New Zealand economic news for 2009 has seen the NZIER’s measure ofbusiness confidence plummet to its lowest level since at least 1970.  Confidence can be a nebulous beast, but measures of activity experienced in thelast three months have also fallen sharply.   More specific questions also addsubstance to the pessimism.   Profitability expectations are the worst since1982, and a wide range of other indicators from the survey are at their lowestsince the early 1990s recession.

If forecasts of economic growth (bothdomestically and internationally) are to be believed, the pessimism isjustified.   Consensus forecasts of New Zealand’s GDP growth for 2009 have beenrevised down by 2.1 percentage points over the last four months.   Forecasts forworld growth have been slashed by even more, and with the speed that eventsunfolded over the last few months of 2008, it is highly unlikely that thedownward revisions have finished yet.

Graph 1

The next 12-18 months shape as"survival mode" for businesses, no matter whether they’redomestically or export focused.   For many firms, most of 2008 was spent in asort of holding pattern in the hope that the domestic slowdown would start tobe counterbalanced by a pick-up in spending underpinned by strong exportincomes.   That relatively benign scenario is no longer going to happen.  Maintaining the holding pattern throughout the rest of this year is not anoption, and many firms will be forced to adopt more aggressive measures toensure that they are still around by 2010.

The most obvious area of rationalisationis staff numbers.   The increasingly tight labour marketthroughout most of this decade meant that, even as the economy has slowed downsince 2006, firms held on to staff more tightly than normal.   But more drasticaction now needs to be taken, as reducing worker hours simply won’t be enough.

Although they tend to capture theheadlines, the bulk of the job losses won’t occur in large-scale layoffs orclosures.   Instead, we’re likely to see large numbers of part-time jobsdisappearing.   Expect unemployment to top 6% (if not 7%) by the end of thisyear.

Some firms will take the opportunity torun the ruler over underperforming business units that havebeen allowed to continue operating while economic conditions have been morefavourable.   If times are tough, then there’s no point having the profitablesections of the company dragged under by ill-conceived albatrosses (orFerrits!).   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 aboutinvesting 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 pressuresare expected to be at their lowest in five years, profitability will still besqueezed and firms will be looking to eliminate other costswhere possible.   Eradicating excessive costs is a valid business strategy inany downturn, and is a discipline that is not necessarily maintained duringperiods of strong demand.   Ultimately, though, cost reduction is a stopgapmeasure for survival – costs can only be driven down so far, and expandingrevenue 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 standready to react to those more favourable conditions.

Staying informed – what to watch

In other words, being well-informed is akey for businesses to be able to take advantage of the next upturn.   Thefollowing is a list of data series that we believe will provide good leads onthe near-term prospects for the economy.   They are all very partial indicators,selected for their timeliness in highlighting different facets of the downturnthat is currently affecting the New Zealand economy.

  • Indications that the Chinese economy has hit the wall are less thanwelcome.   The figures that are perhaps least open to manipulation are China‘s electricity production, where three-month annualgrowth has slowed from 16% in April to -2% by November.   Keep an eye on thesenumbers as a good indicator of broader demand for our exports from the Asianbloc.
  • Given that it remains our largest export market, retailsales in Australia provide an important insight into householdspending trends across the Tasman.   Sales volume growth has dipped from 5.8% to0.8%pa since the end of 2007, and with consumer confidence in recent monthshaving dipped to its lowest level since 1992, further weakness is likely in thenear term.
  • Inextricably linked to the health or otherwise of our export marketsare international commodity prices.   ANZ’s commodity priceindices provide a timely indicator of what income prospects for our exporters(and farmers, in particular) are looking like.   At this stage, commodity pricesin world terms are down 27% from their peak in July, but exporters have beenpartially sheltered by the falling currency – New Zealand dollar returns havedeclined 6.2% over the same period.
  • Seized international financial markets have reduced the availabilityof credit.   With banks being more selective about their lending andconcentrating on increasing margins, financing costs for businesses have beenkept at high levels.   Although wholesale credit spreads in New Zealand eased significantly in early November, a renewed upward trend has developedsince Christmas – even as American spreads have continued to close.   Somesemblance of normality is necessary on credit markets before any recovery inbusiness 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 priceshave 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 apick-up in domestic spending.   Even if consumers maintain a conservativeapproach to spending, the flow-on effects for the residential constructionsector would be more than welcome.
  • The NZIER’s measure of expected domestic trading activityfrom the Quarterly Survey of Business Opinion has a well-establishedrelationship with GDP, providing a two-quarter lead on economic growth.   It isvery rare for this data series to indicate a "false dawn", and at the momentit’s more than twice as bad as the previous record low of 1982.
  • For completeness’ sake, we’ve included a labour market indicator – employmentconfidence from Westpac’s survey.   Given the survey’s only been goingsince 2004, we’re not entirely sure how much genuine information the surveyprovides, but it’s potentially more of a lead indicator any other labour marketfigures (wages, employment, etc), which all tend to lag real economic activity.

We have posted these indicators on ourwebsite at Economic indicators, and will be updating thegraphs regularly over coming months to keep clients abreast of the latestdevelopments.

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