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Does low business confidence foreshadow an economic downturn?

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A fall in business confidence isn’t necessarily the first domino in an impending economic downturn. 

On the last day of November, five weeks after the new Government was sworn in, Auckland real estate agent Susan Dew sold a house in the eastern suburb of St Johns. Bidding started at $650,000 for the unrenovated 1980s two-bedroom unit and three spirited bidders competed until it went for $861,000, less than the newly issued CV of $900,000.

It was the same day as the ANZ Bank’s November Business Outlook survey showed a slump in business confidence to its lowest point since 2009, just after the global financial crisis. Yet the day before, the Reserve Bank began lifting lending restrictions on homebuyers with small deposits and it felt like business as usual at the Harcourts auction room. “It felt good in the room. It wasn’t dead,” says Dew.

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House-price inflation in the city may have paused – figures published last week show that almost half of Auckland suburbs dropped in price in the three months to September – but Dew says she feels optimistic.

Changes of government are often a cue for uncertainty as financial markets and the business and farming sectors wait to see how campaign rhetoric is reflected in new policy. The ANZ survey showed a net 39% of businesses are pessimistic about the year ahead, with business confidence turning sharply negative, and “uncertainty about changing Government policy, a softer housing market and difficulty getting credit” are the likely culprits.

Confidence is weakest among agricultural firms, with this week’s Rabobank Rural Confidence Survey also showing big drops in positive sentiment among horticulturists and dairy farmers. Farmer confidence has tumbled 41% in the past six months, mainly on concerns about what the coalition Government policies could mean for the future performance of the sector. A net 29% of all farmers are expecting a better year in 2018, which is down from 46% in the past six months. The biggest drop was among horticulturists, with net confidence tumbling to 16% from 51% previously.

The tight labour market is a concern in many sectors and is the No 1 headache for employers in a new survey by the Employers and Manufacturers Association. Businesses expecting conditions to improve have dropped to 24% from 47% in the previous survey, and those expecting conditions to worsen increased to 28% from 4% over the period.

The labour market remains a major worry for employers in the EMA survey, with 72% saying it is difficult or very difficult to recruit staff in skilled positions, unchanged from the previous survey. A total of 65%  say there is – or soon will be – a skill shortage in their industry sector. Overall, 49% were using the immigration process to recruit staff, compared with 38% in 2016.

This pool of potential employees may be curbed as the new Labour Government looks to cut it by 20,000 to 30,000 people to ease pressure on infrastructure and housing.

ANZ chief economist Sharon Zollner says her bank’s surveys routinely show that business confidence dives after the election of a Labour Government – but that’s not always a sign that the economy is about to tank. Rather, there is a correlation between sharp falls in business confidence and the election of Labour-led Governments. And a survey by Labour’s pollster UMR reports high expectations that the country is “on the right track”, with the 65% approval rating rivalling some of the best days of the John Key Government. At 17%, the “wrong track” measure has never been lower.

In any case, the economy has been coming off the boil since well before the election, as various factors have conspired to take the edge off its dream run. Auckland’s rampant house-price inflation had been stabilising not only thanks to Reserve Bank lending restrictions, which imposed loan-to-value ratios and then raised the size of the deposit required, but also because of growing nervousness among the Australian-owned banks that dominate the New Zealand banking sector about the level of indebtedness of the borrowers on their books.

At the same time, the Chinese Government clamped down on the wealth-flaunting moneyed class that had been snapping up boltholes in Pacific Rim cities, such as Sydney, Vancouver – and Auckland – by restricting the flow of capital out of China.

ANZ chief economist Sharon Zollner: minimum-wage increase is “really causing concern”. Photo/Ken Downie

Down on the farm

Meanwhile, the country has long since moved beyond what observers call “peak dairy” and the attractiveness of dairy conversions is well on the wane. Farmers have “really felt under siege” over their environmental performance, says Melissa Clark-Reynolds, a professional director whose entrepreneurial efforts have borne fruit in both the urban high-tech sector and the emergent, innovative “regenerative” technology developing in agriculture, which emphasises restoring environments damaged by farming.

Clark-Reynolds says people in the tech sector are feeling “light and happy”. That contrasts with the survey by rural lender Rabobank showing the number of respondents expecting things to worsen doubled in the last quarter to 16%. In part, that reflects the poor growing conditions during a wet winter and the early threat of a summer drought in parts of the country. Yet Rabobank’s general manager for country banking, Hayley Moynihan, says the sentiment fall was largely down “to concerns around the recent change of Government”.

One of the new Government’s biggest challenges will be whether it can speak to and hear rural as well as urban communities, says Clark-Reynolds. “It can’t just be a government of urban millennials and their friends.”

The exchange rate has fallen since the election, interest rates are on a slow upward rise and everyday costs are rising faster than the official inflation measure, according to Statistics New Zealand’s new Household Living Cost Index.

In the booming tourism industry, shortages of hotels, public amenities and new attractions are slowing growth. In the equally busy construction sector, short of both skilled staff and materials, price pressures are rife, and one of the sector’s biggest players, Fletcher Building, choked this year on two big projects where it had grossly underbid.

What's ahead

All of this makes the economic statements by Finance Minister Grant Robertson crucial. He will be wanting to set a positive, more settled tone ahead of the annual national exodus to the beach – a time when conventional political wisdom says pliable political attitudes tend to harden.

There is an unusually strong mismatch between the buoyant mood captured in the UMR poll and the wary, if not overtly hostile, attitudes of the business sector, whose decision-makers will decide next year whether to invest, hire or sit tight.

The vehicle for Robertson’s announcements, on the second-to-last Thursday before Christmas, is the half-year fiscal and economic update and the Budget Policy Statement. Both are requirements of Ruth Richardson’s 1994 Fiscal Responsibility Act.

Tied as he is to Budget Responsibility Rules on government spending and debt levels, Robertson will concentrate on announcing details of policies already known and herald the legislation required to make them real.

First, he will announce the repeal of the tax cuts for high-income earners that National had foreshadowed, in favour of targeted assistance to low- and middle-income families through the Working for Families tax transfer system. Second, he will implement the $500 annual payment for beneficiaries, earmarked for winter power bills, and put into law the Best Start policy targeting infants for between one and three years, depending on family income.

ANZ’s post-election business confidence measure has dived. Source/ANZ

He will raise student allowances by $50 a week; introduce the first of what will eventually be three free years of tertiary study; resume payments – frozen since 2009 – to the New Zealand Superannuation Fund; and create the $2 billion revolving fund that Housing Minister Phil Twyford expects can build 100,000 affordable new homes in the next decade.

None of these policies is new. The difference is that they will exist alongside the new restrictions on home and rural land buying by foreigners and the review now under way of how the Reserve Bank tames inflation.

Robertson acknowledges the jitters in the business community and financial markets. “I get that. Change breeds uncertainty,” he says. But he believes business confidence will rebound as the detail emerges and the Government is found not only to be fairly mainstream, but also to be stimulating the economy just as it was softening.

“We do want to do things differently,” he says. “We do have a different focus and the very first thing we’re doing is saying tax cuts that are across the board are not what we want at the moment. We have real concerns about child well-being, particularly. But, equally, everyone accepts there’s a stimulatory effect from what we’re proposing: the minimum wage increases, more investment into research and development, the families package itself.”

Says ANZ’s Zollner: “Their aim is to put money into the pockets of people who are most likely to spend it. Retailers will probably be pleased.

“It may well turn out that this sort of fiscal stimulus is relatively well timed if other drivers like migration and the construction sector are coming off. Typically, when the housing market comes off, consumption really struggles.

Labour pollster UMR, however, records plenty of positive sentiment. Source/UMR Research

At the Bank of New Zealand, economic research head Stephen Toplis sees economic growth slipping below 3% a year, although the impact of the families package from July 1 next year will mask that.

“We see sub-3% growth for the next three years, but that was happening before the government was elected, and it’s only just under 3%.

“It will be sufficiently strong to see the unemployment rate continuing to fall, but not as strong as Treasury and the Reserve Bank are predicting.”

He expects somewhat slower rates of immigration, down from recent records but still higher than the 20,000 to 30,000 bandied about before the election as Labour’s target. That will erode growth in consumer spending.

Meanwhile, “at least” a half-percentage-point rise in mortgage-interest rates is on the cards, as much because other developed countries are starting to unwind their money-printing schemes and raise their own interest rates as the fact that inflation in New Zealand is likely to start to rise.

But this is no recession in the making. The economic effects Toplis describes will be felt “at the margin”, he says, although Business New Zealand’s chief executive, Kirk Hope, warns that “New Zealand, as a magnet for capital since the global financial crisis because of our stability and positive interest rates, is going to peg back a bit”.

Toplis predicts that growth will be driven more by the public than the private sector and “more inflationary pressure on the input side of cost for businesses” – an economist’s euphemism for the effect of higher wages.

Bank of New Zealand economic research head Stephen Toplis predicts pressure on wages. Photo/Hagen Hopkins

The big bogey

For Hope, and many senior business leaders unwilling to comment so early in the life of a government they need to get on with, one of the biggest worries is wage pressure. It has been largely absent in recent years, but Labour is determined to raise low incomes, not only through a higher minimum wage but also by encouraging the re-emergence of national, industry-wide collective bargaining.

Zollner reports an investor in Japan with a business in New Zealand who was “concerned we might be taking a big step in the direction of Australia”, where his business lost a lot of money as a result of industrial action.

“I said we hadn’t seen indications that the changes were going to be extreme. Under the last Labour Government, we certainly hadn’t had any incidents of the kind he described in Australia and that this Government, to a large extent, seemed to be modelling itself on the previous Labour Government. So while there was a lot of uncertainty, I didn’t think there was reason for undue alarm.”

Hope, who tried and failed to generate media attention on Labour’s industrial relations policy before the election, says he sees a new Government “very mindful of the winter of discontent” that saw the Clark administration forced to mount a charm offensive with business in 2000.

“They’ve indicated they will take their time over that to get it right,” he says of the labour reforms. “On collective pay agreements, setting a minimum threshold across an industry, they’ve said there’s no right for a whole sector to strike and you have to take them at their word on that. They’re saying they have clear objectives on workplace relations, but they don’t see large-scale disruption to the economy from that.”

The progressive raising of the minimum wage to $20 an hour by 2021 is also expected to lead to wage pressure as relativities between various skill levels adjust.

“A lot of this stuff builds over time,” says Toplis. “The minimum wage increase this year isn’t massively more than you’d have got anyway. But cumulatively, over three or four years, it starts to have a big impact.”

Says Zollner: “The increase in the minimum wage is definitely causing concern among smaller businesses, and Labour’s well aware of that.” One possible response: the Tax Working Group has been asked to examine a lower corporate tax rate for New Zealand-based small and medium-sized businesses.

Chief executive of Business New Zealand, Kirk Hope.

The spending conundrum

The new Government has created high expectations among its supporters, not all of whom believe in the same things. Early rumbles of threatened industrial action; teachers’ disappointment that the Government won’t move fast on their pay claims; Health Minister David Clark’s quick dismissal of Helen Clark’s call for free dental care, and Phil Twyford’s rejection of reinstating Wellington’s electric trolley buses have all signalled an approach of restraint and compromise.

National Party leader Bill English is watching all this and not placing too much store on a couple of negative polls on business confidence, which, he says, “reflect a bit of excess optimism that there’s a new set of solutions that’s going to fix a whole lot of problems”.

“I keep telling my guys this is month one of year one in term one. Governments can get better. But I personally think there’s a vulnerability, because they don’t have new solutions. They will struggle to meet the expectations they’ve created.”

Already, Robertson is softening up the party faithful and the general public for that difficulty. As is routine for new governments, Robertson is playing up the discovery of fiscal booby traps left by his predecessor, Steven Joyce. “We find more every day,” says Robertson, who told Parliament the build-up of proposals for capital spending had grown to the point where the sum available in National’s budget for new projects was close to four times overspent.

However, Labour has a couple of tricks up its sleeve. First, its own fiscal plan involves some $5 billion more spending on infrastructure and other capital projects over the next three years than National proposed. It achieves that by paying down debt more slowly, but still intends bringing net Crown debt down to 20% of gross domestic product by 2022, which would be one of the lowest government debt ratios in the developed world. And second, the 2017 Budget surplus achieved under National was a couple of billion dollars larger than Joyce had forecast. All this helps a government committed to spending more.

Labour is philosophically opposed to using private-public partnerships to build schools and hospitals, but it is more than happy to tap private capital for roading, rail and urban infrastructure, such as the $1 billion that will disappear underground for Auckland’s “central interceptor” water main replacement in the next few years.

Infrastructure New Zealand chief executive Stephen Selwood worries, however, that the cancellation of major, resource-consented projects, such as Auckland’s East-West trucking corridor, will add to the strains already evident among local infrastructure providers.

“Contractors are losing key people to international markets already because of the lack of an infrastructure pipeline,” he says. The desire to “bring together urban infrastructure and housing at scale” under Twyford’s housing and transport plans for Auckland is “very promising”, but “the key question is how quickly and effectively they can do that”.

“The quicker the Government can get that pipeline going, including the $1 billion regional development fund, the better, otherwise we risk downsizing of capacity and then prices will go up.”

Infrastructure New Zealand, Stephen Selwood.

Regional friction

It appears that much of that billion-dollar fund for the regions will go to projects that have already been identified, many to fix tourism bottlenecks or replace ageing sewers and water mains in small, cash-strapped towns. But the fund is also a point of friction for the coalition. The Greens’ promise to plant a billion trees to create employment and soak up carbon is a clear case where internal contradictions are proving difficult to manage. Regional Development Minister Shane Jones is already calling the tree planting, which may or may not involve a billion trees, a “work-for-the-dole scheme”. Neither the Greens nor chunks of Labour’s core support base approve of that approach.

The biggest complaints among the Government’s critics relate to Labour policies that are arguably most popular with the general public, such as restrictions on the sale of New Zealand assets to foreigners. Some business leaders are aghast that a Green Party minister and former advocate for Forest & Bird, Eugenie Sage, now decides on foreign applications to buy farmland and mining applications on the conservation estate, but Robertson sees only a signal to foreign money that its purpose needs to be productive.

“We welcome productive foreign investment,” he says of fears the new overseas investment regime will be a turn-off for offshore capital. “We are a relatively small country with capital pockets not as deep as we would like and we will always need support in terms of foreign investment.

“But we also live in a democracy and we have to listen to people who are concerned about the sale of sensitive land. Those same investors will now be investing in a country with the same kinds of rules as Australia,” Robertson says.

Going to the bench

Even if business can get comfortable with a recast set of economic priorities, there is one other big question still to be answered: will this Government be any good?

“My sense of the PM [Jacinda Ardern] is pretty positive,” says Phil Veal, the chief executive at Rangatira Investments, which invests about $230 million in the New Zealand economy, $40 million of it currently uncommitted.

Rangatira owns a chunk of gourmet meats maker Hellers and offers expansion capital for growing businesses. It recently sold its cornerstone stake in craft beer brewer Tuatara to DB and seeks technology and innovation plays through a stake in venture capitalist Movac.

Veal brings a fresh set of eyes to New Zealand’s business and economic landscape, having returned after 25 years in international finance to lead Rangatira. But although Ardern impresses him, he says senior business people commonly worry whether the coalition Cabinet’s “bench” is deep enough.

Veal is “cautiously optimistic”, but “I wouldn’t be writing any big cheques and investing in any new factories or hiring 100 new people or building a new tourism venture until [I knew] what the regulatory framework, what the budgetary priorities, will be”.

Zollner agrees: “People will delay their investment decisions. It’s about timing rather than not doing things until the lie of the land is a little clearer.”

English points to the uncertainties, including the fact that David Parker, the Minister of Economic Development, Environment, Associate Finance and Attorney-General, was forced to abandon his plans for a tax on commercial water use that was both anathema to New Zealand First and became an election campaign headache. He’s always going to “sound extreme” to the middle ground, says English.

On Robertson, English says a version of what many business leaders are reluctant to say on the record: “I don’t know who he is. He used to run the student union or something.”

Many believe it’s too soon to tell how Robertson will perform in the finance role, but numerous business and political observers take the view that while Ardern, Parker, Robertson and Twyford make up this Government’s “kitchen Cabinet”, below them the talent pool gets shallow very quickly.

The TPP factor

Of all the subjects of discussion among businesspeople since the new Government was sworn in on October 26, it is Ardern’s and Parker’s support for the Trans-Pacific Partnership that constantly comes up as a sign this will be a Government more pragmatic than its campaign rhetoric.

On her first international foray, Ardern was clearly committed to ensuring that New Zealand stayed in the tent on the regional trade and investment deal and that, if at all possible, the benefits to exporters should be brought home. Labour activists were angry, but exporters and investors saw realpolitik at play. Veal calls the signs that emerged from the Apec meeting in Vietnam “encouraging”; Hope says they were “quite comforting”.

“The Government is willing to engage and has moved quite rapidly from politics to policy and being quite pragmatic.”

Robertson sees competing narratives for this Government’s agenda – radical reset versus window-dressing the status quo: “Like most things in life, the truth is probably somewhere in the middle. We are trying to transform the economy to be more productive.”

The weeks before Christmas and the first few months of next year may seem long as the Labour-led Government seeks to prove itself.

This article was first published in the December 16, 2017 issue of the New Zealand Listener.