This column looks at the situation in Europe and how it might impact New Zealand business owners. It includes the views of Grant Thornton New Zealand’s Chairman Kerry McDonald, who was also the Chairman of the Government’s Savings Working Group in 2011.

The latest research from the Grant Thornton International  Business Report (IBR) revealed that this year will probably be an even  harder year for Europe than the last. The report showed that the uncertainty throughout the continent has had  a huge impact on business confidence. Expectations for revenues, profits and employment as well as wider economic optimism have all nosedived since Q2- 2011. Indeed optimism for the year ahead dropped to net -17% across the European Union (EU) in Q4-2011. The impact of this on economic growth has been stark. Having expanded by 0.8% in Q1-2011, the EU economy grew by just 0.2% and 0.3% over the following two quarters. In Q4, the Eurozone – and possibly the wider  EU – is estimated to have contracted.

Last year, most economies managed to grind out some growth to avoid a return to regional recession. While 2009 was a global problem, in 2011, Europe found itself at the eye of the storm as an escalation of financial problems in southern Europe turned into a full-blown crisis.

The outlook from European businesses is gloomy. The report indicates that, inside the EU, only businesses in Germany (46%) and Poland (12%) are optimistic about the next 12 months. Some of the other large economies, such as Italy (-20%), the United Kingdom (-35%), France (-46%) and Spain (-62%) are very pessimistic.

The International Monetary Fund has suggested that there may be another 10 years of recession for Europe. If this is the case, the greatest risk to New Zealand will be from a freeze up of the banking system in Europe. If the banks stop lending to each other, the cost of funding New Zealand business will increase and lending will become more difficult.

While the IBR focused on Europe, it’s important to note that the United States (US) is also in a very difficult  position. There are many serious problems in the US including excessive debt, depressed economic growth and political gridlock.

The on-going global financial crisis was caused by poor policies and many elected policymakers are now struggling.

In terms of action, New Zealand businesses need to very clearly understand the present situation and its risks, work to mitigate exposures to these risks and have a backup plan ready, in case it is needed. We can’t do much to influence the EU or the US so we need to focus our attention on what we can do here – where we can make a difference.

New Zealand also faces its own serious challenges: excessive foreign liabilities (which are still growing), excessive government spending, inadequate exports, low national savings, poor  productivity and a lack of innovation. It is now critical that these issues are sorted – and quickly. However doing so will make life more difficult for many business owners. Unfortunately there is no other option – it’s time to face the consequences of silly policies and a big spend up. Now the cookie jar is empty and it’s time to pay.

In addition, economic growth could be slow for a number of years, markets in some countries could collapse, borrowing could become difficult and government spending will need to fall. This might cause a sharp rise in the cost of some services such as insurance and government services and a strong currency might leg rope the competitiveness of important sections of the economy. On the other hand, exports and import substitutes need to grow substantially. And the competitiveness of businesses will be critical – they will need to be lean, focussed and agile and think strategically.

All of the above is basic, and many businesses have already adopted these measures. Importantly though, this is not just a platform for survival but also for growth. While the major developed economies are struggling, the emerging economies are in much better shape. And although there are risks in an interconnected global economy, their growth rates are much higher and they have fewer fundamental problems.

Competitiveness creates opportunities. It’s the same in all markets, including New Zealand. It might be based on lower costs, higher productivity or innovative products or systems. It might target weak competitors or even much larger ones – a once in a lifetime opportunity. Now is the time to seek professional advice to develop your growth strategies and work closely with your banks to secure funding for your projected growth.

Many parts of the global resource sector are booming. Australia and south-east Asia are close and familiar. And there are other pools that are worth a cast. So, for many, putting the shutters up is not your only option. As many of us know, it is very challenging out there, but it is a time to be focussed on opportunity as well as risk. It might be a long winter and you don’t want to be stuck indoors!

Further enquiries, please contact:

Kerry McDonald           
Grant Thornton New Zealand Ltd
T +64 (0)21 433 350