Tony Alexander: Businesses are going to fail – but who’s to blame?

ANALYSIS: Over the coming couple of years, a number of businesses are going to fail, especially in sectors such as hospitality and construction. Whether our economy grows 1% in each of the next two years, 3%, or shrinks 1% will make literally no difference to the number of firms which close down.

When it comes to a bout of economic weakness causing business failures it is not so much the intensity of the slowdown and even temporary economic reversal which matters, it is the absence of extremely strong growth which previously had covered up mistakes and overly risky behaviour.

When there is a strong stream of new customers coming through the doors you can make mistakes on pricing, hiring, production runs, delivery times and so on and recover in a reasonably short period of time. But take away the flood of new clients eager to acquire as much as they can as quickly as they can and problems get exposed very quickly.

On the face of it one could say that the coming failures will represent failed strategies specific to each firm. But if you are in the position of having to close your business down in the next couple of years don’t necessarily think that it is your fault.

We are living through one of the most unpredictable periods in modern economic history. We have seen the biggest groups of economists in all economies fail to predict what inflation was going to do and fail to predict the direction even in which asset prices would move let alone the magnitude.

We have seen most people get their predictions completely wrong for migration flows, construction activity growth, commodity prices, the unemployment rate, and ultimately economic growth rates.

Why have the best and brightest minds in the forecasting business got their predictions wrong? Because there are simply too many unpredictable factors in play to try and place into the context of economic models which had already failed well before we saw the first global pandemic in memory for almost all of us.

No one expected that Russia would invade Ukraine and cause price shocks in the markets for food and energy. The cost of living for households has soared around the world and caused some big shifts in spending away from durable and discretionary goods towards weekly groceries.

Independent economist Tony Alexander: “There are simply too many unpredictable factors in play.” Photo / Fiona Goodall

No one expected that China’s handling of the pandemic would be so poor that their population is almost as exposed to Covid-19 now as was the case for the rest of the world over two years ago. A failure to use modern vaccination techniques means the chain of supply of vital goods coming out of China continues to be disrupted and will likely remain a source of difficulty for businesses worldwide through all of 2023.

None of us truly felt that our central banks would take such an irresponsible attitude towards inflation risks last year. Only in the past few months have central banks admitted they should have started taking away excessively loose monetary conditions last year and now they are playing catch-up and driving an interest rates shock through the world economy.

We could throw in the new awareness that climate change is producing weather events which are becoming increasingly disruptive to business processes.

With so many unpredicted or unpredictable things in play the average business can be forgiven for not implementing the optimal strategy over the past year for managing their staff, materials flows, and inflows of customer orders.

If your business is failing or soon to fail, be aware that it is not all your fault. You have been caught in a maelstrom of factors including the incompetence of our own central bank. Hopefully banks will take the strong role played by external factors in sectors such as construction and hospitality into account as they move to protect the value of their credit extended to struggling businesses in the next two years. They should give some benefit of the doubt to the competence of owners still looking to get their way through to the other side.

- Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz