A boomer year is in store, but with hooks

Paul Kane, Partner, Privately Held Business at Grant Thornton New Zealand said that  at first glance, next year looks like it will be a cracker for companies, but a closer analysis of the repercussions from such a bullish economy uncovers some serious warning signals.

Many New Zealand businesses need to start taking action now if they do not want to get swamped by a rampant economy in 2014.

We’ve just had Statistics New Zealand report our highest terms of trade in 40 years, which is underpinned by soaring business confidence and an economy that the OECD is reporting could grow by as much as 2.4% in 2014 and 3.5% in 2015.

That is pretty heady stuff for business owners, but it does come with a few kickers. There will be pressure on interest rates, the New Zealand dollar is more likely to go higher than lower, inflation could raise its head for the first time in decades and our already stretched skilled employment sector is only going to get pulled even tighter.

So what can be done and when?

Every economist I have listened to over the last three years has stated that interest rates are going to rise. I’m not sure of the level of the increase or timing but 2014 may well be the year. Business owners and managers need to have considered the impact on their business if interest rates move 1% or 2%. Is there an opportunity to fix rates now or in three to six months and create some certainty on repayments?

The continuing strength of the New Zealand dollar is great for the consumer but not so for exporters and those in the tourism and education sectors. If the New Zealand dollar stays above US$0.80 are they prepared? Conversely, remember that the New Zealand dollar goes down by the lift and up by the escalator so they need to be wary should things turn south in a hurry.

The Reserve Bank has been effective in keeping inflation at reasonable levels with the main contributors being:

  • petrol (up 3.7%)
  • rentals for housing (up 2.0%)
  • purchase of newly built houses (up 4.1%)
  • property maintenance services (up 5.1%)
  • electricity (up 3.6%)
  • local authority rates (up 4.5%).

If the above trend continues, and when you add the rebuild of Christchurch and the surge from new housing being built in Auckland, then lower prices in other areas may not compensate for the increases. 

Questions that need to be asked include: Do I need to secure advanced orders now at an agreed price? In agreeing contracts now, will I be able to supply at that price if inflation does take a hold later in the year?

Unemployment is going to continue to drop as businesses grow, especially in the dairy, meat forestry and construction sectors. If the trend outlined in the table below continues, where will businesses source their required labour? And with net migration for the 12 months to September 2013 being only 6,740, migration may not be the solution.

Year

Unemployment Rate

Employed (000’s)

Unemployed (000’s)

Sept 2012

7.2%

2,219

172

Sept 2013

6.2%

2,272

150

For many it will be a matter of having the confidence to employ new staff now, rather than wait until the middle of the year when staff will be harder to find and wages will have climbed. Also, what investments can be made now that will increase efficiency and negate the need to employ more staff to handle the expected increased demand?

Technology has a silver lining, principally the internet and cloud opportunities. These need to be understood for each business, if nothing else to improve business processes. However, new technologies create new opportunities and markets. A willingness to take advantage of new technologies and new marketing approaches, are major characteristics of growing enterprises.

For too long New Zealand companies have been keen to throw more staff at a growth problem, rather than invest in research and development, new technology and advanced processes to gain the same result.

Time is a precious resource and we all lead busy lives. Consider developing a "stop  doing" list as a mechanism to allocate that most precious of all resources: your time. This will allow the new initiatives to be developed without the excuse “I don’t have enough  time”.

Smart business owners and managers will be doing a lot of thinking over the Christmas and new year break. Questions to be answered include:

  • What happens if interest rates rise by 1% or 2%? Should you fix loans now for certainty?
  • Irrespective of whether the dollar goes up or down, how will it affect your business? Do you need to put some hedging in place?
  • Do you have enough staff? Could you increase efficiency rather than employ more staff?
  • How will inflation impact your business?
  • Do you have the right marketing tools and initiatives, including those for the web and social media networks?
  • Are you servicing your existing client base? And how are you obtaining new clients?
  • Are there new products or services that will enhance your offering?
  • Is there an opportunity to sell a current product/service in a new market segment?
  • Do you have the right people to foster growth? Finding good people will only get harder as the unemployment rate drops.
  • Are there acquisition opportunities for your business? Sixty-nine per cent of privately held businesses in New Zealand will go through a generational change in the next 10 years.

Further enquiries, please contact:

Paul Kane
Grant Thornton Partner, Privately Held Business
T +64 (0)9 308 2576
E paul.kane@nz.gt.com