Business News: Recession Looming
Is there already light at the end of the tunnel?
The New Zealand Business sector is feeling pretty sad at the moment. Business sentiment is incredibly low, with compounding negativity in the form of staffing shortages, supply chain issues, inflation, talk of a looming recession, the IRD tightening its noose, COVID resurgence and the prospect of returning to a Red traffic light setting.
While this sounds very doom-and-gloom, New Zealand's leading independent economist, Tony Alexander, told us why there may already be light at the end of the tunnel in his weekly newsletter.
Most business owners operate with a very immediate and short-term view of the world, and their business. Their primary worry is about what's on their desk right now, leaving the next thing for the moment when that is the most urgent. Given the current situation, many business owners are scared and stressed.
Looking through the lens of the broader economic situation, we know that things aren't great – but there are also reasons that this is indeed good, and indicators that the economic pressure has (just about) peaked.
New Zealand's economy, confidence and spending are largely influenced by house prices. And over the past decade, particularly in 2021, house prices have contributed to our buoyant economy and general business positivity.
As you'll almost certainly be aware, house prices had grown to unsustainable levels, prompting increases in NZ's Official Cash Rate and changes to property tax. The Reserve Bank indicated a desire for a 15% decrease in house prices to bring them back to a sustainable level.
We're already well on the way, with numbers announced last week showing the average house prices have dropped by 7.7% compared to their November 2021 peak. The slow housing market and increased difficulty raising finance at current times will likely have the country closer to the 15% mark the next time REINZ releases their monthly Residential Property Report.
As New Zealand accelerates toward this targeted reduction in house prices, original projections of peak OCR and interest rates have reduced significantly. Tony Alexander commented, "Now everyone can see it and that weakness is deepening. That is why interest rates in the wholesale markets have fallen this week and pricing has shifted to the official cash rate peaking below 4% rather than 4.75% at one point.
I still pick a peak of 3.5% but wouldn’t rule out the rate actually topping out at my original predicted peak of 3.0%. It is notable this week that some banks have cut their two-year fixed mortgage rates"
What this tells us, is that the fiscal policy and other global factors are quickly slowing the NZ economy and demand for housing. The Reserve bank will see this and may look to stimulate the housing market and economy sooner rather than later. While, as previously mentioned, there are factors other than the housing market, a lower-than-expected OCR has the potential to shorten any downturn in New Zealand.
In our opinion - Business will continue to slow down, but it may not be as long or as intense as initially anticipated.
Advice for your Business
As Business Consultants, we offer advice, coaching and guidance for the success of your business. We often remind our clients that a business that is good to own during good times is also the best kind of business to own in times of difficulty. Given that there is the possibility of a recession (even if there is reason to think it could be short or mild) we recommend taking action to build a better business. The following tips will offer benefits at most stages of the economic cycle but are particularly important right now.
5 Quick Tips To Use In Times of Low Sentiment
1. Control your emotions
Divorcing emotion from business can help you to see the bigger picture and make more rational decisions. To aid in this, we recommend spending less time on social media and engaging with the news – you'll feel much better for it.
2. Reduce unnecessary spending
It's time to tighten your belt, but we suggest being very strategic and logical with your approach. Sit down with your profit and loss and review each line of spending. Many businesses immediately reduce marketing budgets, but this becomes a self-fulfilling prophecy. When you stop advertising, your business will continue to shrink! As we saw during our initial lockdown in 2020, businesses across NZ slashed their marketing expenditure, advertising became much cheaper and less competitive. A simple Facebook market campaign would easily achieve twice the results for the same budget over this period.
3. Improve efficiencies
New Zealand is well behind the rest of the developed world when it comes to productivity and efficiency. Improving these can be a good way to increase outputs or decrease costs - a must in a downturn. As detailed in one of our recent articles, Labour Recovery and Productivity can be one of the most profitable places to start.
4. Cut the 80-hour-hard-work mentality
If you're a hard-working business owner, only getting by because you've got your head down grinding away working in the business, there's a very good chance you won't be able to out-work a downturn. Stepping back to assess strategy and look for a better way to do things is a critical step - sooner rather than later. If you need help with this, we can offer a FREE business discovery and diagnostic, which will help you to identify your biggest challenges and largest opportunities for improvement.
5. Look for assets on discount and staff to rescue
Every cloud has a silver lining. Slow times mean many businesses will be looking to ditch assets and cut staff. This may bring about opportunities to purchase assets for a low price and get hard-to-find staff. Closing businesses may also have customer lists for low or no cost.
Take Action!
It's easy to read this advice and not act on it - but that will make life more difficult in the long run. To help you decide where to start, we're offering all New Zealand businesses a free Business Diagnostic assessment. This will help you understand the areas of your business that need the most attention before or during a recession.
