Tony Alexander: Banking crisis – the good, the bad and the worrying

ANALYSIS: What are the main concerns of New Zealand businesses right now?

A survey I ran 2-3 weeks ago, with Mint Design digital marketing business, shows that worries run deep about the economy followed by interest rates, customer demand, input costs, and then labour availability. Worries are minor regarding cyber threats and the NZ dollar in terms of it being either too high or too low. The lack of worry about the NZ currency is one of the distinguishing features of this latest period of economic challenge.

Often in the past when hard times come along they are preceded by a surge in the NZ dollar to over-valued levels as the Reserve Bank raises interest rates. Those actions by our central bank have been undertaken, but at the same time interest rates have also been pushed aggressively higher in many other countries in order to fight unusually high inflation.

At around 62 US cents, the Kiwi dollar is down from 70 cents a year ago and 67 cents when the pandemic started early in 2020. This is good for our exporters but it doesn't mean that our farming sector is thriving.

Not only are farmers having to deal with often very challenging weather conditions but input costs have been rising strongly just as they have been for all other sectors. Getting staff is also a major problem and figuring out how to quickly address climate change issues without substantial disruption to production levels is a large concern.

The outlook for our economy and the rest of the world has become slightly worse recently as a result of the disturbances in the banking sector in the United States and to a lesser degree in Europe. It is impossible to know how much banks will pull back on their willingness to lend because of new concerns about nervous depositors. But thankfully, at the time of writing on Tuesday, there were signs of things calming down in the United States. There is good and bad news in that.

The good news is that we are not facing another global financial crisis. The bad news is that the absence of a major hit to business and consumer confidence means central banks will still need to raise their interest rates beyond current levels in order to get inflation down. If you and I were truly scared by events overseas, then cutbacks in our spending would reduce inflationary pressures without interest rates having to go any higher.

Independent economics commentator Tony Alexander: “Profitability is going to be severely squeezed all through this year into 2024.” Photo / Fiona Goodall

Interest rates matter to the business sector but more because of the impact on customer willingness to spend rather than their own debt. Whereas 42% of businesses in my survey said that they are concerned about the general level of interest rates, only 12% said that they are concerned about their business debt levels. This is not a period of economic challenge characterised by major pressure on business cash flows from high financing rates.

In my survey I not only ask businesses what they are concerned about but where they intend devoting extra spending in the coming year. Top of the list is strategy development and that is likely because many current business models are heavily reliant upon staff numbers which can no longer be achieved or sustained. Something has to change and businesses are willing to spend money to figure out what that might mean.

The area in which businesses say they will spend least extra money is inventory levels. That makes sense. Demand is weak in many sectors so businesses want to get their stocks down. It makes sense also that only 2% of businesses say they will spend money on acquiring competitors. But the third weakest area of spending is on new plant and machinery. That is concerning because in a world where the quantities of labour businesses have got used to are simply no longer available there is no alternative other then to boost productivity through labour-saving technologies.

Hopefully when the economic outlook gets better businesses will increase spending in this area. But for now, this absence of productivity enhancing expenditure at a time of rapidly rising wage and labour related costs means profitability in the small and medium enterprise sector in New Zealand in particular is going to be fairly severely squeezed all through this year into 2024.

- Tony Alexander is an independent economics commentator. Full survey results and additional commentary from him can be found at www.tonyalexander.nz