Mark Lister, 2 September 2019

Despite the larger than expected cut to the Official Cash Rate (OCR) and plenty of encouragement from the Reserve Bank of New Zealand (RBNZ), sentiment amongst New Zealand businesses appears to be getting worse, rather than better.

The ANZ Business Outlook survey saw headline confidence fall to -52.3 in August, compared with -44.3 in July.

That’s the weakest since 2008, when we were in the depths of the GFC. In fact, there have only been eight months during the last 20 years where business confidence has been lower.

Firms’ expectations for their own activity also declined in August, falling to -0.5. This is the lowest since April 2009 and is down from 5.0 in July.

This is probably of greater concern, as the Own Activity measure correlates much more strongly with economic growth, probably because this is what businesses know best.

Employment and investment intentions fell, profit expectations were down and pricing intentions slipped, despite reported cost pressures (which suggests margins could be at risk for some).

Agriculture and construction remained soft, while the services sector appears to be a little more upbeat.

All of this points to an economy that is slowing more quickly than expected, and a business sector that is getting more cautious. .

There’s certainly plenty to worry about, from trade tensions and Brexit risks to a slowing global economy and volatile financial markets.

A change in attitude from lenders is also likely to be weighing on some sectors. As the Australian banks attempt to reduce their exposure to some industries, credit conditions may have tightened.

At the same time, New Zealand is better placed than most. Unemployment is at a decade low, growth is reasonable, our fiscal position is strong and commodity prices have been relatively stable.

Interest rates have declined substantially, easing the pressure on borrowers, while a slightly weaker currency will have helped boost export incomes.

The housing market has slowed in hotspots like Auckland, but remains healthy in many regional areas. Although it has slowed from the peak of 2016, migration remains high relative to historic averages and will still be providing support to activity levels.

On balance, we certainly aren’t in bad shape, and many other parts of the world would be envious of our economic fundamentals.

Still, confidence is a crucial ingredient for a healthy economy, and it’s certainly a little worrying that businesses are so downbeat.

When businesses are in good heart about the future, they are more inclined to look for opportunities to grow and do more. This means investing in plant and equipment, and hiring new staff.

If businesses get nervous, the opposite happens and they put some of those plans on ice until they feel more optimistic. When that happens, we run the risk of talking ourselves into a slowdown.