Roger J Kerr says offshore markets largely ignored the unexpected plummet in business confidence

By Roger J Kerr

Last week’s ANZ Business Confidence Survey result for the month of November was a shocker, with business sentiment plunging to new eight year lows.

The sudden pessimism amongst the wider business community is pretty hard to fathom from my point of view.

We do not detect such a rapid loss of confidence on the outlook for 2018 amongst our own client base across New Zealand.

Our clients, largely exporters and manufacturers tell us of bulging forward order books, good prices and sustainable profitability.

The economic fundamentals for the export economy have never been better with the Terms of Trade Index (measure of our ability to pay for imports from export prices) remaining at 40-year highs and the exchange rate is down over recent months.

I can only explain the unexpected plummet in business confidence as being due to two possible causes:

• The business community is ill advisably making a “political protest” statement towards the new Coalition Government, stating that they do not like the impending interventionist changes around employment law, immigration and the housing market. The political protest is futile and a complete waste of time; the sudden doomsayers are better off getting on with their own business and stop looking to Wellington for direction. The situation is that the new government is already having to back-track on most of their pre-election promises of policy change as the reality of the modern NZ economy is better understood i.e. whole industries, such as aged-care, rely on immigrant workers. The danger of the political protest statement is that it becomes a self-fulfilling prophecy as domestic businesses reliant on retail and housing sectors worry about the future.

• Winston is right and the economy has hit a major speed bump and is rapidly slowing up. None of the economic measures support this view and the majority of bank economists see a quick rebound in activity in 2018 following this uncertainty period as the new Government beds itself in. The underlying fundamentals for the economy (outlined above) and just too positive and strong for an across-the-board slowdown. The unfortunate thing is that too many households, business owners and parts of the media believe that our whole economic fortunes are based around the residential property market. They are wrong. It is export commodity prices, niche manufacturing, tourism and agricultural production that drive our economy and determines the GDP growth rate.

Understandably, there was an immediate negative reaction by the NZ dollar forex market to the surprisingly weak business confidence result with the NZD/USD rate sold down to a low 0.6817 last Thursday.

However, the offshore FX markets did not continue with the NZD selling, instead the moved into to buy the cheaper Kiwi dollars as an investment “risk-off” mode in global financial markets caused some to seek out a safe haven currency.

Perhaps the offshore players understand what drives the NZ economy better than local business owners.

The NZD/USD exchange rate has now rebounded off the 0.6800 area on four separate occasions since the late October sell-off on the formation of the new Coalition Government.

Offshore players are clearly not prepared to sell the Kiwi below the 0.6800 level. A slow grind higher from 0.6870 is the more likely direction over the December/January period.

The inexplicable collapse of business confidence in November has all the hallmarks of a “rogue” number and importers and exporters with NZ dollar FX risks should not be speculating with their company profits by believing the Kiwi dollar will automatically depreciate because of it.

The chart below depicts just how correlated the overall exchange rate value (TWI Index) is to our Terms of Trade (export and import prices). It does not suggest further major exchange rate depreciation.

Roger J Kerr contracts to PwC in the treasury advisory area. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com