Politically biased business confidence

Business confidence is often seen as a barometer of political and economic success. The theory goes that if business leaders are confident about the economy at large that's because the economic and political settings are right. And vice versa. But it's not as simple as that, as Bernard Hickey explains.

The evidence shows business leaders are naturally less confident about the wider economy when there's a Labour Government in charge, yet they remain relatively more confident about their own businesses. Hence any slump in wider business confidence is more a reflection of business leaders' pro-National bias than a genuine slide in confidence linked to conditions on the ground.

The 'tell' of this political bias can be seen in the connection between confidence about the wider economy and their own businesses. When National is in power, they are just as confident about their own businesses as they are about the wider economy. But when Labour is in power, business leaders become less confident about the economy as a whole, as can be seen above in the widening of the gap between the two measures in the ANZ survey during the 1999 to 2008 Labour-led Government.

The gap closed again between 2008 and early 2017 while National was in power, but has widened again through mid 2017 and into October 2017 as firstly the uncertainty about who would be in power grew, and then the Labour-led Government was formed in mid-October. Some have worried that this sharp fall in business confidence is a harbinger of an economic recession next year, or even worse, some sort of repeat of the 'Winter of Discontent' seen in 2000 in the first year of the Clark-Cullen Government.

But a closer look shows the most important indicator of future GDP growth is not wider business confidence, but confidence about a business' own outlook. It's much more based on what business leaders know, rather than how they feel about what is happening elsewhere.

This inherent anti-Labour bias was evident in a fresh survey published today.

The Institute of Directors released their annual survey of their members on business confidence and other issues this morning, which showed business confidence about the wider economy had slumped, but business leaders remain positive about their own outlooks.

In line with the recent NZIER and ANZ surveys of business sentiment, the opt-in survey of 943 members in October found a drop in wider business confidence and a much smaller drop in confidence about their own activities.

Net confidence about the wider economy over the next 12 months fell to 14 percent from 43 percent last year and was down from a net 29 percent in 2014 just after the last election, which was won by National.

However, net confidence about the survey respondents' own outlooks fell by a much lesser extent to 64 percent from 70 percent last year and was in line with confidence about their own activities immediately after the 2014 election.

Elsewhere, the survey found labour quality and capability, along with productivity, were the biggest concerns for businesses and other large organisations covered by the survey. It also found more boards were discussing cyber risk, with 50 percent reporting having discussed it, up from 32 percent in 2016.

The gap between confidence about the wider economy and their own businesses from business leaders typically widens when a Labour-led Government is elected into power.

Business confidence almost always dips as well during election periods and transitions between Governments due to uncertainty.

The NZIER's Business Confidence survey below also shows this apparent dip during election years, and how the gap between wider economic confidence (General business situation) and confidence about respondents' own businesses (own trading activity) has opened up during Labour Governments.

This NZIER chart shows how business confidence has fallen an average of 19 percentage points during election years, which was less than the 10 points seen during the 2017 year to the end of the September quarter.

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