SPECIAL EDITION - THE FUTURE OF OUR ECONOMY

The Economy – Where To
 
Last week I was fortunate enough to be able to attend an economic briefing hosted by the Bank of New Zealand’s Chief Economist, Tony Alexander. The thrust of his presentation was to look at what the key drivers of the economy have been and what might happen over 2005 – 2006.

The Economy in Retrospect

Tony noted that the NZ economy had grown strongly since 1999 for many reasons, the main ones being:
108,000 migration gain since 2001
Below average interest rates
High / record commodity prices
Farmers catching up on delayed capital expenditure
Viticulture industry development
Lord Of The Rings / Americas Cup exposure
Labour shortage driving capacity expansion

However, the dark clouds are starting to gather and economic growth will slow over 2005 –2006 due to: High NZ dollar reducing export incomes
Mild housing cycle downturn
Capacity constraints in some sectors Eg. Knowledge and experience
Trading partner growth of 3.1% from 4.2% last year
Above average interest rates
Easing net migration to zero in 2005, maybe net loss in 2006
Farmers ending major capital spending catch-up
Commodity prices falling on average 15%

But wait, there are still other factors which will insulate the economy
Trading partner growth of 3.1% equals the 10 year average
Commodity prices still above average
Non residential construction boom
Accelerating wages growth
High job security giving consumer confidence
Business investment to raise productivity

So why the need to worry?
The answer – high inflation. The risk is that the economy performs better than we expect this year but has a hard landing over 2006 / 2007 due to the Reserve Bank last year failing to tighten monetary policy rapidly enough given inflation pressures and having to catch up and perhaps potentially over-shooting.
The result, a hard landing – Ouch!!

So as business owners, what should we do?
Watch out for complacency in the business operations of our own business and those of our customers
Develop business plans / forecasts and measure impacts such as a 30% down turn in sales, lower margins, higher investments in stock and debtors.
Fix interest rates for 2 to 3 years. Official cash rate likely to be raised to 7.0% -7.5% this year Talk to Walsh & Associates about a business plan to see how robust your business is, given a downturn. Many businesses have never experienced or have forgotten what the impacts of cost cutting are.