Economic uncertainty is creating a tough environment for New Zealand firms

The outlook is filled with uncertainty for businesses.

After two years of no international visitors, a ski season with open borders holds the promise of Australian skiers and the opportunity to bring in additional staff. But a worrying plume of steam at Te Wai ā-moe, Ruapehu’s crater lake, brings uncertainty to tourism firms in the region.

Layered over the top is the abhorrent war in Ukraine. It’s a double whammy. And after COVID-19 balance sheets are stuffed – firms have no wiggle room to get it wrong.

Expect lower investment

When the outlook is uncertain, firms take bets off the table. Hiring those extra workers gets left to the following season. Purchasing the kit to start that new plant becomes hard to justify. Uncertainty reduces not just economic activity today but future activity too.

Our New Zealand Uncertainty Index (NEU index) shows that uncertainty peaked in March 2020, when New Zealand first went into level 4 lockdown. Uncertainty has waned, but remains about 22% higher than normal, largely because of the Ukraine war.

Figure 1: NUE Uncertainty Index - % of NZ media articles referencing uncertainty and the economy

The war in Ukraine is increasing global uncertainty

It’s not just New Zealand businesses that are impacted. Uncertainty is elevated globally. The head of the IMF is worried:

“The potential shock that worries me most is the danger of multiple shocks hitting us simultaneously and our proven inability to deal with them. We need to build that capacity to anticipate and build resilience and respond.” – Managing Director Kristalina Georgieva

Figure 2: Overall uncertainty. Source Ahir, Bloom and Furceri (2000), rescaled

Figure 3: Drivers of the NZ Economic Uncertainty Index

For the first quarter of 2022, the Global Uncertainty Index is 15 percent higher than New Zealand’s index. The Ukraine war accounted for over a third of the uncertainty registered in the global index in March, and about one-quarter of the New Zealand index (see Figure 3).

Policymakers here will need to tread carefully

But New Zealand firms won’t get off lightly. Global demand is starting to wane. Inflation pressures make a precarious path for central banks. Keep interest rates low and inflation becomes a permanent feature. Hike interest rates into existing headwinds and risk recession.

The Reserve Bank’s Monetary Policy Committee will face tricky decisions in the coming weeks. Interest rates need to move higher. But steering a course that keeps New Zealand from recession is tough: the “fog of war” clouds the outlook. Policy will need to move decisively and may need to move quickly as conditions re-emerge. Keeping an eye on uncertainty will help.

Government too will have a role to play. The hangover from COVID-19, including consumer spending induced by wage subsidies and new-found housing wealth and government spending is adding too much heat to the economy.

Firms will be cautious on investment plans despite the low cost of financing.

For more information, contact Dr Kirdan Lees at kirdan@sense.partners