Business confidence – is it turning?

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Are we starting to see the signs of a slump in business confidence? While consumers might be cheery, the most recent surveys on this topic are showing a decline in business confidence in the long term.

The question we need to ask is whether this a trend or a blip? The fundamentals underpinning the economy haven’t changed – arguably they have improved. In the Government’s first budget, the Minister of Finance signalled ongoing growth of around 3 percent accompanied by a surplus of $3.1 billion this financial year.

However, this is reliant on business confidence remaining stable along with financial performance. The corporate tax take is a vital revenue stream for the Government.

It is not unusual for business confidence to dip when a Labour government comes into power, and rise when a National government takes over the reins.

What remains key for business is that issues such as the labour shortage, skills shortage and immigration are not going away anytime soon.

The pre-election rhetoric around slashing immigration numbers has taken a more pragmatic tone since the coalition was formed. And while we constantly hear from employers about the difficulty of navigating the immigration system for their particular needs, the headlines around reducing net immigration by enforcing targets seems to have dissipated.

With unemployment remaining low the ongoing issue of finding staff with the required qualifications, skills and a positive work attitude remains a headache for employers. We are yet to see any compelling policy from the government on how to address this.

Proposals to change employment law are likely to exacerbate this headache rather than cure it. We remain unconvinced that the proposed industrial relations changes will deliver the high wage, high performing economy the Government wants.

Rather, the underlying intent of the Employment Relations Amendment Bill seems to be more compulsion, more regulation, reduced flexibility (for employees and employers) and increasing overheads.

We argue that beefing up the labour inspectorate would be more effective at addressing many of the problems the legislation seeks to rectify, and cost less overall.

Especially when businesses are reporting a squeeze on their profit margins. For example, while the recent increase in the minimum wage was well signalled employers are saying it’s the parity argument causing a flow-on impact to their wage bill which is a concern. Combine this with other costs to business such as price of oil and increase in fuel taxes and you can see why there will be a mindset to hunker down.

Businesses sense that costs may rise in the next few years and this may not necessarily be accompanied by an increase in sales. For example, it’s proposed the minimum wage will increase to $20 by 2021. A business with five full time employees on the minimum wage will see an increase of $7,900 per annum to its wage bill this year with the minimum wage having just gone up to $16.50, at $20/hour the wage bill for the five staff will increase by $44,800 per annum.

This raises important questions for business. If they are unable to absorb this cost what do they do? Do they sell more units, do they raise the cost of their products and services or do they look for ways to automate processes? Decisions around the minimum wage can’t be made in isolation of other dynamics at play in the economy. Questions of access to capital for automation come to mind and proposed changes to the Overseas Investment Office further erode confidence.

Once business starts to get gloomy, forward looking investment decisions, expansion plans and subsequent hiring programmes go on hold; the doom loop takes hold.

Ill-considered tinkering with economic policy for ideological purposes will do nothing to raise productivity or confidence. To transition to a high value, high wage economy we need a confident, energetic and productive business sector.

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Kim Campbell

Kim Campbell is chief executive of the Employers and Manufacturers Association kim.campbell@ema.co.nz