Achieving growth in times of uncertainty

As 2024 promises a challenging economic climate for New Zealand businesses, we explore how sentiment is shifting perception and creating opportunity for investment in productivity to achieve growth amidst uncertainty.

In March, Business Canterbury released the results of its “March Quarterly Canterbury Business Survey”, highlighting generally positive business confidence, but also some potential headwinds coming as the effects of rising costs and dwindling consumer demand bed in. While only a regional snapshot as we wait on December 2023 GDP figures due out in mid-March, it’s widely expected this sentiment will be reflected in the national numbers too. 

According to a report by Kiwibank from the same month “Our Take: Kiwibank Economics”, the bank expects that the New Zealand economy stood still, recording flat growth in the December 2023 quarter. Technically avoiding another technical recession. The report is at pains to point out that this flat outlook (and not decline) is no cause for celebration, saying that while our strong migration continues to support output, but given a larger population, output will be soft on a per capita basis.

“In the wake of breaking record migration growth, we were all stunned to see the economy contract 0.3 percent [in the September 2023 quarter]. On top of that, there were massive downward revisions to history. The technical recession we had over the December 2022 to March 2023 summer, that was technically revised away, was revised back in. And all up the Kiwi economy was shown to be nearly two percent smaller than all us economists, including the RBNZ had believed it to be,” explains Sabrina Delgado, Economist at Kiwibank.

“We continue to expect 2024 to be a year of low growth, as high interest rates continue to depress demand. It’s what the RBNZ needs to tame inflation. But with our view of rate cuts commencing in November, growth should start to pick up into 2025,” she says.

The bank is predicting growth of just 0.7 percent in the December 2023 quarter. “Weakness will be notable across the board. We are expecting the goods producing industry to continue in decline as manufacturing remains a sore spot. Activity within the primary production industry is also expected to be weak. Meanwhile, service industry also continues to be weighed down by businesses and households that continue to pull back.”

According to the Business Canterbury survey, the top five issues facing businesses in the current climate are the inflationary pressure and rising interest rates, consumer confidence and demand, productivity and growth, increased compliance costs, and labour market constraints.

“What worries me most is that 71 percent of businesses still expect costs to rise over the next 12 months, with more than a third experiencing significant impacts from rising input costs, wages, and interest rates. Alongside rising costs, increasing concerns about consumer confidence and demand are prompting businesses to focus more on cost and profitability management, resulting in another quarter of subdued investment and hiring intentions,” says Leeann Watson, Chief Executive at Business Canterbury.

She is however buoyed by the fact that 63 percent of respondents are still looking to invest in their businesses over the next 12 months, even though this is lower than levels in the mid-70s just 12 months ago.

“In more positive news, businesses’ ability to deal with disruption is on the rise, with 79 per cent confident in their ability to do so this quarter, up from 66 per cent six months ago. There has also been a very clear rebound in the perceptions of Government economic management, with a net positive sentiment for the first time since Business Canterbury started running its survey,” she says.

There’s no doubt that small and medium businesses play a crucial role in driving our economy, making up more than 25 percent of the country’s GDP.  And while some of these numbers will give business owners cause for concern, there is however reason for a positive outlook, albeit with caution. The question now becomes: how do businesses create a meaningful growth strategy in response to challenges around productivity, labour constraints and sluggish spend? Especially in such uncertain times. 

Productivity, or lack thereof, seems to be a challenge facing many Kiwi businesses. As a country, our productivity growth is also low compared with other OECD countries. This is concerning as economists often equate productivity as the key source of economic growth and competitiveness.

“New Zealanders generate significantly less output than many other small advanced economies, despite working longer and harder comparatively as a nation,” says Spark CEO, Jolie Hodson. “Our productivity is a persistent challenge that has seen little change over many decades, but what is changing is the urgent need to address it.

“Aotearoa is getting bigger, older, and more diverse. Inflation is forcing a greater focus on efficiency and cost control, and we are facing more frequent and extreme weather events. The good news is that the pace of technological advancement globally is accelerating at an even faster rate, and advanced digital technologies are now reaching a level of maturity where they have the potential to solve business challenges where it wasn’t possible in the past.”

Spark and the New Zealand Institute of Economic Research (NZIER) recently launched a new study, “Accelerating Aotearoa businesses one technology generation forward” to explore how these productivity challenges can be addressed by the acceleration of advanced digital technologies.

The study combines insights from global research of small-advanced economies, economic modelling by NZIER, and Spark’s knowledge of current and future opportunities enabled by digital technology. The findings reveal clear and compelling benefits of modernising New Zealand’s economy – with a 20 percent uplift, the use of advanced digital technologies is predicted to increase industry output by up to $26 billion over the next decade, and GDP by as much as 2.08 percent per year.   

Increasing productivity will drive income growth and better living standards. Increasing investment in research and development (R&D) and technology will enable New Zealand businesses to increase their productivity and economic growth. The report highlights three areas of opportunity for businesses to help increase productivity and accelerate growth.

The first is measuring progress. Measuring the digital adoption of New Zealand businesses at a national level would unlock and target investment in productivity improvements. Unlike the European Union and many other developed countries, New Zealand has no robust or sustained way of measuring digital adoption or progress. As a result, there is no way of tracking how we’re improving, if at all.

To help businesses understand the state of their current adoption of digital technologies, Spark has provided a series of Digital Maturity Frameworks to help organisations review their current use of AI, data analytics, IoT and cloud computing.

The second area of opportunity is the harnessing of artificial intelligence (AI). AI can enable productivity gains beyond labour productivity alone. But it may also assist businesses who are struggling to attract labour is a tight market. 

NZIER’s “Quarterly Survey of Business Opinion” supplementary survey highlights that when it comes to digital technology, generative AI is the biggest knowledge gap identified by New Zealand business leaders, with 44 percent agreeing they lack enough information.

“Spark supports the development of an AI Strategy for New Zealand through collaboration across the public, private, and community sectors. A nationwide AI strategy would support AI growth and innovation and help ensure we support our local AI industry to thrive – so that New Zealand remains a creator of AI, not only a consumer or net importer of it,” says Jolie.

The third opportunity taps into our innovative acumen suggesting greater investment is needed in research and development. In the last 20 years, New Zealand’s R&D spend has been consistently below the OECD average, with business expenditure on R&D particularly low. This means our ability to transform businesses with technology is under-leveraged.

Such investment in technology, research, and resources is often met by a cashflow stumbling block – having the financial resources to invest in future development and growth. “It’s widely accepted that small-to-medium sized businesses (SMEs) make a significant contribution to the New Zealand economy. On average, SMEs experience negative cashflow for four months a year, which prevents growth and entrepreneurialism. 

A new locally-owned FinTech start-up, Taxi, is however giving Kiwi businesses access to a new form of funding at half the cost of big bank overdrafts – a gamechanger for small businesses. Powered by IRD-approved intermediary Tax Traders, Taxi utilises smart technology to unlock funding supported by the billions of underutilised pre-paid provisional tax paid by 250,000+ Kiwi businesses.

For Taxi co-founders Nicola Taylor and Josh Taylor, this has been more than a decade-long journey. “In our experience at Tax Traders, only a small number of large businesses with significant resources have been accessing funding using New Zealand’s unique tax framework in this way. We’re a team of accountants and tax experts on a mission to change that and unlock these benefits for all Kiwi businesses. 

“We understand how important it is for businesses to have enough capital to grow and the Auckland lockdowns showed us first hand that successful businesses still need access to cash to help ride out the tough times. It was in the lockdown of 2021 that we knew we needed to develop Taxi to help more Kiwi businesses. We built Taxi to provide a meaningful alternative to a big bank overdraft, one that is easy and affordable,” says Nicola.

“Having improved access to funds, and at significantly reduced costs, makes it easier for businesses to smooth out fluctuations in cashflow, invest in productivity improvements, and support innovation. Taxi has the potential to make a tangible difference to individual businesses that could in the long run stimulate the economy as a whole,” says NZIER Principal Economist Michael Bealing.

NZIER calculations show that savings on overdraft costs alone could easily exceed $50 million annually. And these kinds of savings will be significant for SMEs as the Institute predicts a weaker growth outlook for 2025.