Businesses "get it", consumers in la-la land

By Pattrick Smellie

Friday 27th February 2009

New Zealand businesses "get it" that an economic tidal wave is heading our way, but consumers have yet to realise the gravity of the world economic recession, according to the BNZ's chief economist, Tony Alexander.

In a grim weekly analysis of the recent round of "extremely bad data releases" from major economies such as Japan and United States, Alexander says New Zealand consumer confidence levels were "still well above levels of one and three years ago".

"New Zealand surveys show businesses 'get it'," said Alexander. "They plan slashing capital expenditure and staff - hence the jobs summit this Friday. Consumers, however, do not 'get it' yet.

"Until we see some light at the end of the tunnel offshore - and be in no doubt that there remains zero light for now - one cannot rightly talk about the end of the period of weakness in New Zealand.

"All we can realistically do is note there is a significant hit to come our way from a tourist sector implosion, but there will be some insulation from low interest rates, tax cuts, and improving migration flows."

Perhaps reflecting a disjunction between business and consumer sentiment, the latest ASB Housing Confidence Survey, released today, found that 53% of respondents thought that now was a good time to buy a house, because house prices and interest rates are expected to keep falling, up from 45% in the last survey, in October 2008.

This week's National Bank Business Outlook survey showed a net 20.1% of businesses expect their own levels of activity to decline over the coming year, the second lowest reading on record and largely unchanged from the -21.5% result in the last survey undertaken in December.

A net 29% of businesses plan laying off staff compared with a net 22% in December, while a net 15% plan cutting investment from 13% in December.

"These results are very weak and indicate businesses are well aware of the weakness offshore (even if householders are not) and are saying they plan cutting their cloth to suit," said Alexander.

Released on the eve of the Government's Jobs Summit, the NBNZ outlook is closely watched in economic circles and sparked a round of negative commentary from several major finance houses.

"The most painful part of the recession - job losses - seems upon us with hiring intentions hitting a fresh low," said Goldman Sachs JB Were analyst Shamubeel Eaqub. The only good news in the NBNZ survey was that confidence levels "didn't get any worse".

While monetary policy easing appeared to have been well managed, and a further one percentage point fall in the Official Cash Rate to 2.5% was expected, this had yet to make any improvement to business conditions in New Zealand.

The NBNZ's chief economist, Cameron Bagrie, likened current economic conditions to the game theory known as "prisoners' dilemma", where the consequences of confession over silence were extremely difficult to judge.

"The rational or optimal solution is for all to hold our breah and ride through the biggest global downturn of our time," Bagrie said. "Don't pull down the shutters for fear of making it worse. Unfortunately, simple game theory, individual circumstances and human nature suggest otherwise."

Negative sentiment was most marked in the agricultural sector, according to the NBNZ outlook survey, with a net 61.7% of respondents in that sector predicting a deterioration in economic conditions, compared with 36.8% in manufacturing, 37.6% in service industries, and 54.3% in the retail sector.

Alexander said businesses should adopt extreme caution at present, even "explicitly planning to miss out on the initial leg of the recovery".

"Some years down the track one might look back at such a strategy and say in hindsight it was wimpy. So be it. But there is a world of difference between missing a growth/profit opportunity and surviving to tell and tale, and taking a gamble and losing when people like ourselves are telling you the risk is completely unknown," Alexander said.

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