Government anti-business reforms bring gloom

By Rob Hosking

Thursday 20th April 2000

Economists point to a darkening of mood among businesses despite the recent rosy growth figures - and the central bank's concern the economy is growing too fast.

That mood was beginning to emerge even before stockmarkets around the world performed a spectacular face plant.

This week's quarterly survey of business opinion showed deepening pessimism among businesses and yesterday's decision by the Reserve Bank to lift interest rates again is seen as unlikely to help.

The business opinion figures are significant in that they show an overall increase in pessimism, yet respondents are optimistic about their own firms and key indicators such as investment intentions are up.

Bank of New Zealand economist Tony Alexander has compiled a list of 14 factors influencing the growing pessimism - and the most significant are those emanating from the public sector.

Business is "very scared" about the economic impact of the Labour-Alliance government, especially the labour market reforms, he said.

And businesses are also watching the Reserve Bank with the same wary and jaundiced eye a dog owner watches a well-intentioned but clumsy puppy.

"The business people I've been speaking to are saying, 'Great, we've got the economy growing again,' " he said.

"But after the experiences of 1994-96 they are really worried about what the Reserve Bank might do to interest and exchange rates."

Businesses were also suggesting they planned to put up their prices and they expected their input costs, for supplies and labour, to rise.

With those feeding through into inflation, further tightening by the central bank was always on the cards, he said.

Yesterday's rate rise was expected by most economists, as Reserve Bank governor Don Brash indicated to a parliamentary select committee a month ago he may have to lift rates earlier than expected.

In March the central bank projected a series of rate rises over the coming 18 months. At the time no rate rise was projected for the bank's six-week review of monetary conditions, which fell yesterday.

As expected, the Reserve Bank lifted its official cash rate 0.5% last month but what caught many economists by surprise were the comparatively mild comments accompanying the rate rise. The bank had unexpectedly lifted the rate in January and Dr Brash had uttered some stern words about the risks of the economy overheating.

"In November, remember, the Reserve Bank was concerned, in January it indicated it was ready to act, but by March the valium had kicked in and the official outlook was so much calmer," Bancorp economist Stuart Marshall said.

"While the Reserve Bank was calm, the markets were bemused and not just a bit anxious."

He said there was a need for more consistency from the central bank.

The March statement also projected rate rises for the next 12 to 18 months but yesterday's rise could mean those rises projected in a year's time would not rise as steeply as they might have, according to New Zealand Institute of Economic Research director Alex Sundakov.

The main factor driving yesterday's rate rise is statistics indicating the economy's capacity is reaching its ceiling.

"The capacity utilisation figures in the business opinion survey certainly reinforce the case for an interest rate rise," ANZ economist David Drage said.

While domestic economic pressures all lined up in favour of a rate rise, the picture form offshore was far more murky, he said, particular after the stock market turbulence of the past seven days.

"What's been going on in the markets certainly raises some issues. But any potential impact from that, in terms of a wealth effect in the US or other export markets, isn't likely to happen for some time."

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