Election jitters in New Zealand boardrooms and a hard-hitting Australian budget have seen the gap in business confidence levels between the two countries narrow sharply over the last three months.
New Zealand business confidence for the next 12 months has dropped 18%, from 88% in first quarter of this year to 70%, while Australia’s has rebounded from 36% to 50%, according to the Grant Thornton International Business Report (IBR) which surveyed businesses in 34 economies. New Zealand confidence levels have been higher than Australia since 2011.
Mark Hucklesby, Partner and National Technical Director, Audit, for Grant Thornton New Zealand said the shadow of the elections is definitely starting to fall on New Zealand businesses.
“I have been in several boardrooms over the last few weeks where the impact of the elections has been discussed. It’s clear that the offshore customers of many New Zealand businesses are seeking views on the likely outcome of our pending election.
“One thing that these offshore customers want is stability. Even though the National Party has a strong majority, the quirks of MMP leave overseas business leaders with a sense of unease which in turn dents confidence among New Zealand business.
“This survey was conducted before the Reserve Bank’s latest interest rate rise and I suspect this move has probably further eroded confidence levels given its impact on exchange rates,” he said.
Hucklesby said that despite the drop in confidence levels, New Zealand is still ranked sixth in the world, one place lower than last quarter. India (86%), Ireland (84%), United Kingdom (80%), Germany (79%) and the United States (74%) are ahead of us.
“This is still a very good ranking. If you look at the rise in confidence throughout the rest of the world, especially in Australia where business confidence has climbed to its highest level since 2010, then there is no reason to think that the New Zealand economy will not continue to perform strongly.
“The influence of Australia on New Zealand cannot be underestimated. They are still our second biggest trading partner after China and a buoyant economy in Australia is beneficial to New Zealand. Australia’s strong business performance through the Global Financial Crisis and the fact they did not slip into recession was a real positive for this country.
“I firmly believe that the ruthless budget delivered mid-May in Australia helped their business confidence level. They knew that something drastic had to be done and the budget delivered some tough measures. Also, one should not forget that while their budget figures aren’t great, their economy is still ticking over strongly. Good growth figures coming out of India and China have also helped Australia,” he said.
Other key questions included in the IBR included:
Are businesses in China still predicting slow growth?
While economic optimism remains slightly depressed (30%), business growth prospects have improved
- 47% expect to raise profits (up from 16% in Q1) and 61% expect to increase revenues (up from 31% in Q1)
- suggests businesses are feeling more confident in their own growth potential even if doubts remains in the wider economy over local debt levels
What are the prospects for India following the election of Modi?
Indian businesses are the most optimistic in the world again (86%)
- 93% expect to see revenues climb over the next 12 months, 90% profits
- 76% expect to hire more workers
While their stock markets have increased noticeably, the economies in both Japan and the US have slowed sharply in Q1 - what does the data say about the outlook?
Seems to have little impact on the US which ranks fifth globally for optimism (74%)
- however revenue, profit and employment expectations are slightly down on Q1 but remain well above global average;
- the proportion of businesses concerned about a shortage of orders has also risen from 14% to 22% over the past quarter
- Japanese businesses are less optimistic about the economic outlook (down to 5% from 17%), however this marks the third straight quarter of positive optimism
- despite the increase in the sales tax from 5% to 8%, 15% of businesses expect to increase profits over the next 12 months., up from 1% in Q1
- regulations/red tape has risen 5pp as a constraint to 38%
Why is there such a divergence between developed and developing markets?
The divergence between the performance of developed and developing markets has certainly become more pronounced over recent quarters
- G7 optimism has risen for three straight quarters (53%) due to brighter growth prospects in UK, US, Japan, Germany
- BRIC economy confidence (36%) has slipped slightly since Q1; China confidence remains relatively low (see above) and Brazil (32%) is not receiving the World Cup boost the government hoped for
How has the situation in Ukraine affected the results?
Businesses in Russia are actually more optimistic (15%) in the economic outlook than they were in Q1 (6%) - perhaps they are hoping for a more assertive Kremlin, further evidenced by the conclusion of the Russia-China gas deal
- however, most neighbouring eastern European states have seen big slides in optimism: Poland (down 20 percentage points), Baltics (down 9 pp), Georgia (down 12 pp)
- has not dampened confidence in Europe more broadly (up 6pp to its highest since 2007)
- however, Russian business expectations for revenue (down 42pp) and profit (down 39pp) have dropped sharply
- Poland (down 20pp), Baltics (down c.10pp) have seen similar falls in growth prospects
In light of the European election results, held at the end of May, what messages can be drawn from the data?
Optimism in the EU has risen to its highest since 2007 at 43%
- Eurozone optimism also up 10pp to 35%
- suggests popular discontent with the EU does not extend to businesses
- however, divergence between France (-14%) and Germany (79%) still very evident
- Italian businesses still show little optimism (6%) but Spain continuing to recover (28%)
- Ireland (84%), UK (80%) and Germany (79%) occupy three of top four optimism positions
- all three economies are expecting to see big export growth over the next 12 months
Given the political situation in Thailand, why is optimism so high?
Thai business confidence has risen from -10% in Q1 to 13% today
- businesses like certainty so the military stepping in to take control, with the promise of further elections at least offers more security and an end to the violence
- tourism is important to the Thai economy so greater security should also attract visitors