Matter Of Opinion

22 July, 2000

Keywords Macroeconomics & Money; Statistics

The premier survey of business opinion has been produced by the NZIER since 1961. When I looked at in the 1980s, I was struck by how unhelpful the business opinion question was in comparison to the questions of what the business respondents had actually done, and what they planned to do in future. These matters were not their opinions, which may or may not be well informed. They are the actions the respondents have taken and are going to take in their business lives, on such things as investment, employment, output, and inventories.

Sadly the media focus on the NZIER business opinion question in the survey, ignoring the rest. The mistake is compounded by the National Bank introducing its own survey in 1988, which asks only businesses opinions (business confidence) and nothing about what they are actually doing. Because it is monthly it gets even more media focus than the more respectable NZIER survey.

Last June’s National Bank survey reported a big deterioration in business confidence. A net 60 percent of the sample said they expected business conditions to deteriorate in the next year. This contrasts with almost all forecasters, who expect the economy to grow, albeit more slowly than it did recently. (However, if businesses panic, the opinion could be self-fulfilling, and forecasters may lower their expectations.)

What we do not know from the National Bank Survey, because they do not ask is whether businesses cutting back on their plans for investment, employment, production, and stocks. In the past, we have had businesses with opinions of the economy contradicting with what they were doing themselves. So we cannot be sure what is going on. There are a number of possibilities.

The most likely one is that New Zealand businesses are reflecting a general sentiment in the world, that prospects for the world economy need to be lowered. Among the reasons are the steady hikes in US interest rates, plus the increasing realisation that world share prices reflect irrational exuberance rather than any realistic assessment of the fundamentals. The chief evidence for this view is that other countries are experiencing reductions in business confidence too.

At the other extreme is the view that the situation is peculiar to New Zealand, and reflects a loss of faith of the business community in the current government. The Right tells us that the government is doing various wicked things to the business sector: the Left tells us it is businesses punishing the electorate for preferring a government which is not subservient to business interests. The first theory seems to be irrational, for the government policy changes have only been minor and malevolent only to the thinking of those who are so ideologically committed they view the last fifteen years as a great economic success. (For instance the ACC reforms take us back to where we were a year ago, when confidence was much higher; the employment reforms are hardly radical in international terms.) The second implies that the political judgement of businesses is as shallow as it appears on the business pages.

A variation is that it is not the government but the Reserve Bank who has got it wrong. It is raising interest rates, so the critics say, when the economy is slowing down. This reinforces the downswing, so things will get a lot worse. This column has argued that it is not the technical competence of the Reserve Bank which is at fault, but its underlying theoretical basis (which, alas, will not be addressed by the review later this year). Basically monetary policy is muddled in that the government, the Bank, the financial sector, and reality all have different views of what is happening.

A third possibility is the economy is undergoing a structural twist in which the tradeable sector, stimulated by the lower exchange rate, is expanding, at the expense of the non-tradeable sector. (If so, this may be government’s intention, because any addressing of the danger in our huge current account deficit requires such a twist.) Business opinion surveys are biased towards the non-tradeable sector, for they excluded exporters such as farmers, while those that are included are large firms who get only the same weight as small businesses in the non-tradeable sector.

A fourth possibility is that businesses have at last taken a hard look at the economy’s performance over the last fifteen years, and come to the realisation that it has been poor – possibly the worst in the OECD (outside some east-central Europeans). They have switched from an irrational exuberance about our prospects to rational realism, although they may have over-reacted.

I cannot tell the proportion of each the relevance of each of these explanations. Even the more sophisticated NZIER survey is not detailed enough to evaluate that. I do know there were major collapses in business confidence in 1967, 1970/1, 1974, 1978/9, 1981/2, 1984/5, 1991, and 1994, according to the NZIER survey. The current slide began about mid 1999 (following a minor slide in early 1998). I am not saying all of these were the same as the current one, or even of similar magnitude. But one can say with confidence these things happen (more often than not in the first year of the election triennium).