The bigger the better in tough times

Business conditions appear to be improving, the report says, “but economic activity in many industries remains well below levels observed before the recession”. Business confidence and profitability survey measures were consistent with economic recovery, “although expectations have been pared back significantly in recent months”.

The number of firms reporting higher incidence of overdue debtors has moderated since the recession ended “but remains high, especially in the building sector”. Then we are told the subdued operating conditions could cause financial difficulties for some firms. Industries that have not experienced material recovery tend to include high proportion of small-to medium-sized enterprises, the report says. “These firms could be particularly vulnerable, especially as they have been the most affected by tighter bank lending conditions and have reported weaker profitability than larger firms.”

This does not quite gel with the tone struck in the opening sentence of Reserve Bank governor Alan Bollard’s media statement when releasing the report where he says New Zealand’s financial system has benefited from recovery in the global economy, with banks now better positioned to meet future credit demand and support economic growth.

Domestic rebalancing of the economy is proceeding with households and businesses keeping spending low as they reduce debt, Bollard says. “Combined with improved export commodity prices, this is reducing New Zealand’s current account deficit and external indebtedness, both of which are positive for financial stability.”

Then comes another inevitable ‘but’ …“but pressures on the New Zealand dollar are not helping. The New Zealand dollar remains relatively high, reflecting easy monetary conditions and weak economic activity in the major developed economies. If sustained, this will make the continued rebalancing of economic activity towards the tradables sector difficult to achieve.”

In short, we are far from popping the champagne tops in celebration of return to the good times.


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