Sunday, April 21, 2024

Beware of sentiment and snake oil

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It’s discipline this economy needs if it is to make the change of government a real fresh start, Cameron Bagrie says.
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A new government signals new direction and change. Sentiment has lifted.

Business confidence has risen to the highest level since mid-2017 with a net 23% of businesses confident about the economy according to ANZ’s Business Outlook Survey.

It’s almost as if a magic potion has been formulated in the past few weeks. 

General business confidence with the agriculture sector has risen to minus 12 (previous -44), the highest reading since mid-2021 and a big jump in a month.

Should we get excited? Beware the snake oil in magic potions. Business confidence is higher under a blue hue than a red one. There is a bias. Business confidence was negative every month under the previous government excluding four months (three of them when we bounced out of the first covid lockdown and the fourth in September 2023, the month prior to the election), and never rose above +10. 

Business confidence in the agriculture sector was positive for one month during the previous government’s entire tenure.

The economy did reasonably well with the unemployment rate sitting below 4% over an extended period though the fundamentals slowly eroded as costs increased and hit profits. Business confidence is a poor economic indicator not well correlated with economic performance.

Sentiment needs to be matched by substance. Ignore business confidence – but not the other questions in business confidence surveys. 

A net 56% of businesses in agriculture expect to be making less money over the coming 12 months compared to a net minus 6 for the wider economy. A net 40% of agriculture firms expect to invest less in their business compared to +4 for the wider economy.  Employment intentions are negative for agriculture. Lower profitability hits investment and employment. A net 64% of agriculture expect it to be tougher to get credit over the coming year. The economy-wide read is -21.

Any new government always blames the departing one for a host of problems. We will see a lot of that.

Inflation is a problem. Taming it requires pain. The Reserve Bank’s November Financial Stability Report points to resilience but also emerging stress. 

Within the inflation narrative, we focus too little on the impact of business. Costs ruthlessly undermine businesses/ farms and hit profits. The NZX50 is below where it was pre-covid. 

The Financial Stability Report states what we all know: “The agricultural sector is facing difficult economic conditions, owing to falls in dairy and meat prices, elevated operating expenses, and increased debt servicing costs.”

Both S&P and Fitch have endorsed New Zealand’s AA+ credit rating though. We can’t be in too bad a place overall and relatively better than a host of other countries. 

There is a big list of “to dos”. Top of list is getting a policy platform that can bring NZ a step together. Division – which we have – is both economically and socially corrosive. 

Next is battling inflation. Getting the Reserve Bank to focus solely on inflation and not a dual mandate of employment and inflation will not make a difference. The proposed tax relief package needs to be parked. Fiscal policy needs to be restrictive and help the Reserve Bank. Education, health, infrastructure and law and order require a lot of attention. 

NZ has the largest current account deficit in the OECD, signalling an unbalanced economy. Climate change policy needs pragmatism. We need more plumbers and fewer preachers in politics to get things done.

Steps to help improve profitability across the primary sector are essential. Without profitability, capital will not flow.

It would be folly for businesses and households to look to the government to provide all the solutions.

The seeds of the next economic upswing will ultimately be sown by businesses. Market signals such as currency movements provide direction. A low currency rotates growth from spending to earning.

Tough times bring appetites for change. Cost structures get analysed. Different ways of doing things identified. Good businesses take over poorly run businesses. Higher labour costs encourage substitution for technology and capital investment.

Discipline is returning. It started with the torching of Liz Truss, the temporary prime minister of the United Kingdom, and morphed into the United States losing its triple-A credit rating. Local authorities in NZ are having to address funding pressures, in some cases by selling assets. There is nothing like tough times to sharpen thinking and bring reality back to the table as opposed to ideology.

Tough times are an elixir for better productivity. Bad news, such as the demise of an entity, can ultimately be good if that entity is replaced, or gobbled up by a better one. That is an economy at work. We need to see that in action over the coming years.

The danger is that we reach for easy levers such as migration, take the dividend (growth) but fail to fund it properly (infrastructure, housing), and complacency sets in.

We need substance rebuilt into the growth equation, and productivity and innovation provide it.

“Back to basics” has been used as a political tag line, but it applies to households, farmers and businesses too.

The new government can help provide direction and will look for some wins. One could be major if we can secure a trade deal with India but beware the snake oil and political speak. 

It will take time to rebuild NZ’s economic base, but politics is full of short-term incentives. We need to see examples of the hard questions being asked, and steps taken. An example would be expanding the Commerce Commission investigation into banking beyond retail banking and into where banks make 60% of their profits.

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