Mood of the Boardroom: Foreign concerns dominate at home

Brian Fallow

Business leaders are much more confident about the New Zealand economy, the global economy and the general business situation in their own industries than they were a year ago.

Then the economy had only just clambered on the bank from a deep, cold and fast-flowing Recession River. The concerns that are top of mind for business leaders reflected that.

A year later, recovery has taken hold, though it is slower than after previous recessions. Nervousness about the international outlook persists but a different set of domestic worries have come to the fore, notably about productivity and the state of the Government's books.

Overall, the survey found higher levels of disquiet about the international environment than about domestic factors. In particular respondents are watching global capital markets to see if the gusts of alarm about sovereign debt could trigger a sequel to the crisis of 2008.

Though the focus has been on the weaker peripheral members of the euro zone, the picture across the major developed economies is of large structural deficits, gross debt approaching 100 per cent of GDP (where it has not already exceeded it), and the looming fiscal challenge of ageing populations.

The Reserve Bank expects the main impact of this renewed turmoil in financial markets to come through upward pressure on the cost of funds to New Zealand banks rather than through demand for exports, even though the European Union as a whole is our second largest trading partner.

For what it is worth, respondents' fears of protracted global recession, and by extension about the sustainability of current high export commodity prices, are at odds with the consensus view of economic forecasters abroad.

Forecasts for growth among New Zealand's trading partners have continued to improve even since European debt issues came to a head in April, despite lacklustre expectations for the major western economies.

"We're now looking at 4.3 per cent for 2010, up from 4 per cent in April's consensus survey," BNZ economist Craig Ebert said, "And the view on 2011 is holding up at a respectable 4 per cent."

The implications of all this for global exchange rates also loom large in respondents' minds. Money has flowed out of the euro into the US dollar and, less helpfully, into commodity currencies including the kiwi dollar.

But the recent decision by the Chinese authorities to allow at least some degree of appreciation of the yuan should help.

A sustained global recovery requires substantial unwinding of the very large current account imbalances which built up over the past 10 years or so. Countries with large current account deficits, mainly the Anglo economies including New Zealand, need export-led recoveries while those with large surpluses such as China, Japan and Germany need to expand their internal demand.

If China is resuming the gradual appreciation of its currency in train between 2005 and 2008 - and it is still too soon to be confident about that - it is at least a step in direction of the necessary global rebalancing.

It should also vent some of the pressure building up in Washington for retaliatory action against what is seen there as a beggar-thy-neighbour policy.

The risk of protectionism was another concern survey respondents voiced.

On the home front labour productivity, No 4 last year, now tops the list of concerns. Over the past 30 years labour productivity has grown by an average of 2.1 per cent a year but in the most recent complete growth cycle (2000 to 2006) it was just 1.3 per cent a year, half its rate in the 1990 to 1997 cycle. In half of the industries the statisticians recognise, productivity actually declined.

Respondents' concerns about the adequacy of infrastructure - somewhat ironically right up there with the level of Government spending - has a bearing on productivity, as do skill levels.

Skills and labour shortages rank as the third biggest concern (after the perennial runner-up, regulation).

The tight labour market which preceded the financial crisis was marked by widespread shortages of skilled labour. With memories of that fresh, the recession was notable for the degree of labour hoarding, where firms preferred to cut hours than headcount and run the risk of struggling to replace people when business picked up again.

The employment cycle turned in the March quarter and as the labour market improves - albeit, economists expect, in a gradual way like the recovery itself - wage growth will pick up from its current cyclical lows.

Wage increases this year rank No 7 among businesses' domestic concerns, up from No 10 last year.

This year's survey has two concerns that did not feature at all last year, how much the Government spends and how much it borrows - the former more than the latter.

It is as if fiscal policy was seen last year as a bungy cord but is seen now as a hobble on future growth.

In point of fact, New Zealand's fiscal outlook has improved markedly over the past year.

But it is a sign of the times internationally, and evidently here as well, that people are more focused on the state of their government's books.

In Budget 2009 we were looking at 10 years of deficits and a net debt track that climbed from below 10 per cent of GDP in 2008 to 60 per cent by 2023 with no end it sight. In Budget 2010 it is six years of deficits and net debt peaking at 27 per cent of GDP in 2014. The level of the NZ dollar, the foremost concern a year ago, has dropped to No 6.

It is not surprising the exchange rate is of concern when it has appreciated 10.4 per cent over the past year on a trade-weighted basis, though it is surprising that it was a bigger concern at the time of last year's survey when it had fallen 11.5 per cent over previous year.

The emissions trading scheme and its impact on energy costs rank just after wages as a concern.

This may be largely a matter of timing. The ETS starts to apply to the transport, stationary energy and industrial process sectors today.

And businesses may still be getting their heads around how much, or how little, the ETS will affect them.

The Government's amendments late last year to Labour's scheme capped and then halved the impact on electricity and fuel prices.

And the threshold at which trade-exposed firms qualify for an offsetting subsidy, payable in emission units, is very low: if carbon costs are more than 1 per cent of a firm's revenue it qualifies for 60 per cent compensation, and if more than 2 per cent, for 90 per cent.