Economist explains 'confusion' over economy 'doing well' despite low business confidence

A sustained increase in the price of goods and services in New Zealand is putting pressure on businesses and pushing confidence down, despite the economy "doing well". 

That's why the Reserve Bank dropped the Official Cash Rate (OCR) to 1 percent in August and will likely do it again this month, ANZ economist Miles Workman told Newshub. 

"Some people find it confusing that the Reserve Bank is cutting interest rates while we're still doing alright. The key theme behind that is that growth is travelling at a pace that's not quite consistent with building inflation pressures."

In other words, despite the New Zealand economy doing relatively well, inflation - or the sustained increase in the price of things - is increasing faster than economic growth, making it difficult for businesses. 

That's reflected in the latest ANZ and ASB business outlook reports for October, which both showing low confidence among businesses, but also shows it's slowly picking up.  

Business confidence increased 12 points to -42 percent in ANZ's survey but 42 percent still report that they expect general business conditions to deteriorate in the year ahead.

ASB described business confidence levels as "depressingly low".  

The Auckland Business Chamber's survey showed business confidence increased by 24 points, but is still in the negatives at -28.  

ANZ CEO Antonia Watson said the economy, while growing at a slower pace, is fundamentally in good shape which is promising for businesses moving into 2020.

"Demand for commodity exports is healthy, construction activity is firm, plus lower interest rates and an easing NZ$ are supporting activity."

Can 'business confidence' be trusted?

Workman said business confidence has been a "lingering issue". 

But there is some scepticism about business confidence surveys and whether they truly reflect the state of the economy or reflect a "political protest". 

Rodney Dickens, managing director of Strategic Risk Analysis, has written about how he thinks the surveys have "major political bias", and often don't take into account the usual fall in confidence when Labour takes power. 

Workman said the surveys ask "a bunch of questions and some of those questions are related to businesses' own activities, through to questions including around hiring new staff". 

He said those results "do correlate quite well with actual economic outturns", but admitted questions around how businesses are feeling about general business conditions don't correlate so well with GDP. 

"It adds a bit of a flavour for how businesses are feeling."

Finance Minister Grant Robertson.
Finance Minister Grant Robertson. Photo credit: Newshub

Finance Minister Grant Robertson said the latest financial figures from Treasury show the economy is "in good shape". 

Last month the Government posted a $7.5 billion surplus, and Robertson said it means the Government's overall debt position of 20.3 percent of GDP is lower than the 21.0 percent expected in Budget 2019. 

"The low debt gives us space for further opportunities to invest to strengthen the economy against global headwinds", he said, pointing to the US-China trade war. 

National's finance spokesperson Paul Goldsmith said Robertson needs to stop "falling back on 'global headwinds' as an excuse for everything that's wrong with our economy". 

He also highlighted the ANZ survey's finding that firms' expectations for the year ahead remained 'uninspiring', particularly for the retail sector, which is "exposed more than most to minimum wage rises". 

Workman agreed that "key themes that have been very persistent" in ANZ surveys have included struggles around skilled labour and difficulty finding it, and also "policy changes such as higher minimum wage".

He said retailers are "facing squeezed margins and finding it difficult to increase their prices essentially to recoup those higher costs associated with minimum wages". 

Goldsmith also pointed blame at failings in the Government's KiwiBuild programme, but Workman said, "I don't think KiwiBuild would be affecting confidence in the construction sector."

He said what would be affecting confidence in the construction sector is "profitability squeeze", evident by construction companies like Ebert and Corbel closing down.  

The Government announced plans in April to partner with New Zealand's largest construction companies to help the sector's reputation of collapses and poor-quality builds. 

There are good signs for the economy, such as unemployment being at its lowest since before the 2008 global financial crisis. 

Workman said ultimately, ANZ is not forecasting a recession.

"We're still pushing out around 2 percent annual growth which is pretty good."