There are certain things we economists tend to talk about at different points in the economic cycle. When the economy is growing strongly, we warn that rising inflationary pressures (wages, property leases, materials etc) will produce rising interest rates, and maybe it would be a good idea to fix one’s interest rate for a few years rather than sit floating.
We might also note that rising interest rates tend to push the Kiwi dollar higher, so importers might want to hold off locking in their purchase prices through currency hedging, and instead wait for some currency appreciation. We’ll talk about potential labour shortages and the need to look after good staff and boost investment in more efficient machinery and processes to reduce reliance on less-skilled and perhaps less-motivated people (who can end up costing a business more than the outputs they help produce).
Then, when times look like they are going to be weak, we will talk about potential for falling interest rates, a falling exchange rate, the danger of locking into long-term property leases, the need to get inventories down, and perhaps the desirability of just pulling one’s horns in for a while because downside growth risks beckon.
But in this current environment we have a problem. None of us has ever lived through a period of a global pandemic, lockdowns, and exhortations not to socialise closely with other people. We are experiencing a recession which is by no means normal.
It has not been preceded by soaring interest rates and a high NZ dollar, and it is not associated with falling export prices. It is decidedly abnormal in that sharemarkets have quickly soared to record or near-record highs following a quick 35 percent sell-off. House prices are rising and people are scrambling to buy whatever they can, and there is no large currency decline underway, which would set the usual scene for a strong rebound in tourism receipts. It is not normal to see such strong spending on household furniture, domestic travel, appliances and computer gear, and general home furnishings.
Forecasting is extremely difficult now, and businesses in all sectors need to be very careful not to base their expectations for performance over the coming year or two on their experiences during previous recessions in 2008/09, 1997/98, and 1990/91.
Plan for 2022
Nevertheless, we can still make our decisions on the basis of some reasonable assumptions and knowledge. Firstly, assuming successful vaccines are developed and distributed over 2021, our international borders are likely to open again in 2022. That will bring a potentially strong lift in inbound tourism receipts, which will boost the overall pace of economic growth. In a nutshell, that is what I recommend we position our businesses for.
Secondly, having set aside $14bn of their $50bn Covid-19 support fund, there remains plenty of scope for the Government to provide additional support to the economy over the next 18 months, even if no new large outbreak of the virus should occur.
Thirdly, it is highly likely there will be extra support for growth from the Reserve Bank cutting interest rates further, perhaps negative. Their cuts will cause additional declines in business borrowing costs – though not to below zero levels. Low borrowing costs are likely to be with us for many, many years.
Fourthly, we now know what happens when people exit a lockdown. They try to return to their normal lives as quickly as possible, and if they have spare cash for any reason – not being able to travel overseas, accumulated savings etc – they will spend it to give themselves better lives.
Finally, we know that not everyone suffers during a normal recession, let alone this special event. This downturn is unique in that the bulk of employment pain is being felt by people in the hospitality, tourism, entertainment, and retail sectors. They tend to be young, earning below average and highly variable incomes, and they don’t tend to own a house. Hence the absence of large house price falls.
Secure your assets
Based on these factors and a few others, we can build a general framework for businesses to operate under, including those in the motor trades.
This downturn will end, and well-capitalised businesses that moved early to get control of cashflows and working capital, will be in a position to take advantage of the opportunities the next few years bring. Some businesses will not make it through to 2022. This is the greatest opportunity most of us will ever see to secure valuable assets – including people – for the stronger growth environment most forecasters expect for 2022.
This may mean not just picking up some discounted assets, but also initiating new efficiency-oriented investments keeping one key factor in mind: the shortages of labour that plagued businesses before Covid-19 came along will not only return quite quickly, but they are still there in many sectors.
Investment with a labour-saving focus remains as vital now as it was eight months ago. It would be nice to think the incoming Government would look to accelerate growth in business capital expenditure through policies such as accelerated depreciation. There could be some items like that in the May 2021 Budget. But it depends on who wins October’s general election, and if a Labour-led Government is returned. The chances seem high that the focus of policy changes will be more towards assisting the unemployed as opposed to driving up the pace of economic growth through assisting businesses.
Note that my comments regarding labour shortages fully take into account the layoffs expected as the third wage subsidy period comes to an end. Many people set to lose employment will, as noted earlier, be in the service sector.
However, it may be that these predominantly young people will not shift to the countryside to pick fruit. They are highly adaptable and know nothing other than constant change in their lives, and they are likely to be far more willing to ‘have a go’ at something in a city or large town than any previous unemployment-affected generation. So, be open to the possibility of more hiring to train people on the job than you might have considered in the past.
Banks will lend
Back on capital spending, one impeding factor is the low willingness of banks to take on new risks. That will change. For the moment banks are flat out servicing mortgage demands and looking after existing clients and the many businesses still needing to get cash flows under control.
As we advance through 2021, banks will start to open their doors to new clients. It could be useful for businesses thinking about more funding next year to lay the groundwork now. When the banks’ doors open wider, they will prioritise their new lending toward those who have their detailed plans ready; showing exactly what they want to do and exactly what financial assistance they need.
Use interest rates to your advantage
When you do come to finance new capital spending, don’t stay fixated on the very low floating or short-term fixed rates that banks might offer. One day, we’re not sure when, interest rates will go back up again. So, fixing some interest rates for periods of three years and longer over the next few years could be a good idea.