Beneath the slump in business confidence
Business confidence about the wider economy slumped in the second half of 2017 as the Government changed from being National-led to Labour-led. Bernard Hickey looks at whether it was based on more than just political prejudice.
Are New Zealand's business leaders jumping in fright at shadows because 'their' National-led Government is no longer in power? Or is something more substantial changing in the bowels of the economy and the Government to justify their darker outlook?
So far, the jury is out, but there is plenty of evidence to suggest the pessimism is not justified by what is happening in the wider global economy or in the accounts of the businesses themselves.
This week the New Zealand Institute of Economic Research (NZIER) published the results of its December quarter survey of business decision makers about what they were seeing in their own businesses and what they feel is happening in the wider economy. The NZIER's survey is the longest running business opinion survey and is closely watched by the Reserve Bank, Treasury and financial markets. It does not survey farmers, but is otherwise seen as representative of the economy at large. It also tends to echo the other main business confidence survey conducted monthly by the ANZ Bank, which is known as the Business Outlook survey.
Both surveys have shown sharp falls in wider business confidence in the September and December quarters, but they also showed businesses remain confident about their own businesses. This separation between actual experienced business conditions and expectations about wider business conditions has tended to open up during Labour Governments. Under a National Government, businesses believe everyone is doing better and just the same as they are, but they believe other businesses are doing worse than their own business during a Labour Government.
The NZIER's QSBO survey published on Tuesday largely confirmed the Business Outlook results released just before Christmas. Confidence about the wider economy fell to multi-year lows that were net pessimistic in late 2017 as the Government was being formed, while confidence about their own businesses fell to a lesser extent.
Confidence about the wider economy dropped 16 percentage points to a net 11 percent negative in the December quarter from a net five percent positive in the September quarter. Confidence about business leaders' own business, however, dropped by much less. Net confidence about 'own activity' fell from a net 13 percent positive in the September quarter to a net 10 percent positive in the December quarter. That is in line with the long run average of 10 percent.
Jobs growth and household income growth actually remained strong through the second half of last year and the global economy is purring. Construction activity remains at high levels in Auckland with the prospect of plenty more building to come from the Government's Kiwibuild programme.
"Previous QSBO surveys have shown business confidence tends to fall after Labour takes office, in contrast to a lift in confidence when National takes office, but the effect on actual activity has been muted," NZIER's Principal Economist Christina Leung said in the report.
"Businesses may be worried about the outlook for the New Zealand economy under the new Labour-led Government, but for now this is not reflected in demand in their own business," she said.
The contrast between the wider outlook and the actual experience was evident in the detail of the survey results, with a widespread fall in confidence, particularly in manufacturing and retailing not being matched in the actual experience of individual businesses.
NZIER said the pessimism was not reflected in activity indicators.
"Domestic sales remain solid in the retail and manufacturing sector. The building sector also reported solid output and new orders," Leung said.
A mirror image
The flip-side of this political skew to confidence surveys was also clear in the Westpac McDermott Miller employment confidence survey released on Tuesday morning.
The survey of 1,555 employees (rather than employers) in the first 10 days of December showed lower wage workers were particularly confident in the December quarter with an expectation that a change of Government would be good for their pay packets.
The new Government has promised to raise the minimum wage by 27 percent over the next four years to $20 an hour. It has also promised to revisit pay equity deals for large sectors such as teacher aides, mental health workers and hospital workers, which could potentially repeat the double-digit pay increases agreed by aged care workers and the Government last year.
The Westpac-McDermott Miller Employment Confidence Index rose 0.1 point to a 10 year high of 113.9 in December from November.
Workers reported more job opportunities with expectations of more to come, but only a few saw wage increases.
“The exception to this pattern is those households whose annual income is less than $30,000," said Westpac's Senior Economist Satish Ranchod.
"Households in this group are the most optimistic they have been about their chances of receiving a pay rise since 2011. In part, this will be related to the ongoing strengthening in the labour market over the past year. It’s also likely that many of these households are set to benefit from planned increases in the minimum wage over the coming years," Ranchod said.
McDermott Miller's Managing Director of Strategy and Economics, Richard Miller, also noted sentiment of various categories of employees had been influenced by the election result.
“Some categories who were pessimistic under the previous Government are less so now and others more so,” he noted.
“Perhaps a highlight of the survey results is that all employee groups earning less than $100,000 per annum increased in confidence and are optimistic this December quarter,” said Miller.
“This is largely because of more positive expectation of increased earnings over the coming year. In contrast, employees in the highest income bracket (more than $100,000 pa), while still optimistic, lost confidence slightly, because they expect lower earnings and are more anxious about job security,” he said.
Miller also pointed out private sector employees were less confident than in the public sector, with Wellington workers seeing a particular lift.
“This is the first time the public sector has been more optimistic than the private sector since June 2009. This helps explain the divergence in employment confidence of Auckland, the main private sector employment centre, and Wellington, the main public service centre (confidence in Auckland fell by over 6 points to 115.6, while in Wellington it increased significantly, up 11.2 points to 113.9)."