Business confidence slides, but less than for other elections

NZIER's measures of general business confidence and own trading activity going back to 1996. The red dots show periods covering elections. Source NZIER.

Business confidence fell during the election campaign, but less than for other elections. Bernard Hickey reports uncertainty about the shape and policies of a new Government are affecting business sentiment, but vehicle and retail sales show businesses and consumers have not put away their wallets.

It's tempting upon seeing a sudden drop in business confidence during coalition negotiations to conclude that this is a new and shocking thing that proves New Zealand is economically allergic to a Winston Peters-driven Government under MMP.

But we've been here before and this cycle's slide in confidence is actually less than in previous election cycles, including ones where Governments seen as business-friendly were definitely changing to centre-left-leaning Governments. Consumer and business spending remains solid, with record high new car sales and retail sales growing firmly during September. The economy may be softening a bit (and it was anyway before the election because of a stall in the Auckland housing market), but it is far from falling off a cliff.

ANZ reported last week that its monthly Business Outlook survey of confidence found confidence about the wider economy fell from a net 18.3 percent seeing improvement over the year ahead in August to a net zero percent seeing improvement in September. That was a two-year low.

"Some of the paring back may reflect a maturing business expansion, but we’re more inclined to put the move down to political uncertainty," ANZ's Cameron Bagrie said just before the election.

As expected, the election result was not conclusive on the night, leaving Winston Peters as the 'kingmaker' to decide whether a National-led Government will win a record fourth term, or whether a Labour-Green-New Zealand First Government will prevail. The uncertainty was extended when Peters said he would not begin serious negotiations until October 7 when the special votes are counted and the results finalised. He has said he plans to make his choice by October 12.

The New Zealand Institute of Economic Research's (NZIER) Quarterly Survey of Business Opinion found confidence about the general business situation fell to a net seven percent seeing an improvement in the September quarter, which was down from a net 17 percent seeing improvement in the June quarter.

"A decline in business confidence is not unusual heading into a General Election, as businesses and households hold off committing to major spending plans given the uncertainty over the formation of the new Government," NZIER's Principal Economist Christina Leung said.

However, the 10 percentage point drop in general business confidence for this election was less than the average 19 percent fall seen during the MMP era after 1996.

Other measures of economic activity, as well as consumer confidence and business confidence show consumers and businesses feel relatively confident and are still spending, despite the hiatus in Government circles.

The ANZ's seasonally adjusted measure of wider business confidence found a fall from 29 percent to 14 percent and businesses were much more confident about their own business outlooks, which is often seen as a more reliable indicator of economic activity. ANZ's September survey found a net 29.6 percent were confident about their own outlooks, down from 38.2 percent in August.

NZIER's survey found a net 27 percent saw an improvement in the next quarter in their own businesses, up from a net 24 percent who saw improvement in the June quarter. Their experienced trading activity fell to a net 13 percent seeing improvement from a net 17 percent the previous quarter.

Hiring and investment strong

Both surveys also found hiring and investment intentions were strong. NZIER's survey found a net 19 percent expected to increase staff numbers in the next quarter, up from 12 percent the previous quarter.

Investment intentions for buildings rose to 18 percent from three percent and intentions for plant and machinery were 17 percent, which was solid from 20 percent the previous quarter and well above the long-run average of zero percent in net terms.

There are also few signs of a slowdown in business investment or consumer spending other than a general softening of activity related to the 20-40 fall in house sales volumes over the last year in Auckland in particular. That is linked to the Reserve Bank's third round of Loan to Value Ratio restrictions announced over a year ago and a general tightening of credit by banks facing shortages of easy and cheap local term deposit funding.

There was also a drop in confidence in the building sector, again connected to the tighter credit for developers and rental property investors in Auckland through late last year and early this year. Financial sector confidence also fell in line with the fall in credit growth and real estate activity.

Rentals, utes and SUVs still selling like hot cakes

Sales of big ticket items suggest the economy is still rumbling along with growth in the two to three percent range.

The Motor Industry Association (MIA) reported a record-high 14,507 vehicle sales in September, up 4.5 percent from the same month a year ago.

"The traditional slowdown in new vehicle registrations during an election period failed to materialise in September," MIA CEO David Rutherford said.

Sales of passenger and SUV vehicles were up 6.8 percent in the calendar year to the end of September, while commercial vehicle sales were up 18.6 percent over the same period. Neither suggest any sort of collapse of confidence.

"As the 2017 year progresses economic conditions of the last 18 months remain largely unchanged with low interest rates, strong net immigration, strong New Zealand currency and stable domestic economy," Rutherford said.

Sales of Toyota Corollas for rental car fleets were the most popular in September. The next popular in the top 10 were the Toyota Hilux, the Ford Ranger, the Toyota RAV 4, the Mitsubishi Triton, the Holden Colorado, Toyota Hiace, Kia Sportage, Toyota Yaris and Nissan Navara. Apart from the Yaris, most are linked to purchases by small and large businesses catering to busy construction and tourism sectors.

Consumer spending still solid

Consumer spending figures released on Tuesday by Paymark also showed spending in September was solid at $4.8 billion, which was up 4.5 percent from a year ago. It did show a continued slowdown in spending through housing products merchants, which was in line with the fall in house sales volumes and new residential investment, rather than the election.

The sales transacted through Paymark in September were flat in seasonally adjusted terms from August, although it reported core retail spending growth was unchanged in September from August. Underlying spending through Paymark, which handles 70 percent of transactions, rose 0.8 percent in seasonally adjusted terms in the September quarter from the June quarter.

The economy is coming off the boil through the second half of the year, but it looks to be linked most to factors to other than the political uncertainty, which is expected to be cleared up within weeks anyway.

The housing market slowdown in Auckland is beginning to put a chill in the air for the top end of the market. Rutherford reported his analysis of luxury marque sales (Audi, BMW and Mercedes) showed sales in calendar 2017 were likely to be down 5.5 percent down on the previous year.

Hotel night sales growth also continued to cool through August and September in the wake of the Lions tour that finished in July.

Economists also cautioned against jumping to the conclusion that the election uncertainty had stalled the economy.

"Political uncertainty is no doubt weighing. But sentiment remained above long run averages and interestingly the drop wasn't as sharp as in other pre-election periods," ANZ's Bagrie said after the NZIER survey was released.