The FY2021, Q4 index does not paint a pretty picture about the current business environment. The inflationary pressures in the New Zealand economy are well documented, and these are clearly evident in the indices we track. Most notably, businesses are struggling to cope with soaring shipping costs and a challenging labour market. Costs continue to mount for companies and, based on our analysis, aren't going to slow down any time soon. Interest rates remain low, and New Zealand’s monetary policy belt is only just starting to tighten, so inflation is likely to remain an issue in the year ahead. Put simply, businesses are facing increased costs across the board, and they need to be ready to weather this storm.
Some organisations might feel compelled to take an axe to their balance sheet, but this could reduce the quality of your products and services, and damage morale internally within your company. Just as many countries learnt during recovery efforts following the global recession, sometimes a bit of investment can go a long way. Our economic context, with low interest rates, could be a good time for businesses to rejuvenate themselves with a fresh coat of paint, rather than batten down the hatches. Times like these are ideally suited to reviewing where your business is at, adjusting your strategy and processes, and looking to conduct business in new and innovative ways. Think about retooling your business models and approach to markets, while looking to maximise your company’s strengths and patching up its weaknesses. Now is also a great time for businesses to look at re-engineering and building resilience within their supply chain - possibly through avenues such as multi-sourcing and utilising more domestic production. Given the finance options available, now is the time to be bold and invest in truly innovative supply chain solutions.
Interest rates have started to slowly creep back up, and the Reserve Bank appears to be tightening its belt on the monetary policy front. Market commentators expect interest rates to gradually continue to rise, with some pointing to a year of continued hikes.
The Dubai crude oil index, one of the three major crude oil indices, has continued to track upwards since an initial drop at the beginning of the Covid-19 pandemic. Despite international pressure, OPEC members seem unwilling to increase oil supply to the market, signalling that prices are likely to remain high for some time.
Energy generation has been in the news for all the wrong reasons, and it appears that this could continue in 2022. Meridian, New Zealand’s largest power company has stated that wholesale prices may remain high for some time, primarily fuelled by gas shortages. This has placed a lot of price pressure on some of their larger commercial customers.
Interest rate increases have buoyed the value of the kiwi dollar somewhat, but the market is displaying a degree of uncertainty as it awaits possible interest rate increases from the Fed. This, combined with inflation related volatility makes the exchange rate environment an exceptionally variable one for firms to traverse.
Unemployment plummeted to its lowest level since 2007 in the June quarter, placing immense labour cost pressure on firms across the economy. Immigration restrictions have exacerbated the labour shortage facing businesses, and this means labour cost pressure is likely to continue for the foreseeable future.
Labour shortages, rising consumer demand and Covid-19 related supply chain disruptions have wreaked havoc on international shipping markets - a situation only worsened by events like the Ever Given's blockage of the Suez Canal. Analysts expect these high prices to remain firm in 2022, meaning this is likely to be an ongoing pain point for businesses.
Interest rates, exchange rates, fuel, power, labour market costs and shipping costs form the foundation of any businesses’ expenses. The last 18 months have been unprecedented, both in terms of the pandemic and our economic performance. The index reflects this.
Spurred by never-before-seen levels of monetary policy stimulus, New Zealand seems to be in the midst of an economic sugar rush - one that is spiking the inflationary environment, and creating a difficult and uncertain business environment for kiwi firms to traverse. Almost every component of the index seems likely to continue to rise, signalling that the index could continue its march past the 90th percentile mark, and into previously unseen territory.
What will these conditions mean for Kiwi businesses? The long-term picture remains unclear, but in the immediate term, companies need to be aware of the increasing costs that they will be facing in the coming months and plan their business strategy accordingly.
The Grant Thornton Procurement Index equally weights the six economic indicators below based on their relativity to historical levels. A comparison of these components shows the relativity of the cost indicators to their levels back to 2018.
Unprecedented shipping, power and oil costs continuing an upward creep, and increasing interest rates suggest that businesses are facing continuing price increases in all areas of their expense account.
Almost every pressure we measure is showing strong upwards growth, and most of them are predicted to continue this trend. It seems likely, therefore, that the index will continue to show strong upward growth not only for the end of 2021 but well into 2022.