Navigating economic headwinds: Insights for SME owners

With contrasting reports on New Zealand’s economic outlook we get a take from an economist, the Auckland Business Chamber and the Minister responsible for Small Business and Manufacturing who collectively emphasise the importance of resilience, cost efficiency, and strategic planning for SMEs as they ride the economic roller coaster and look to capitalise on future growth opportunities.

Survive ‘til 25: it’s a white-knuckle ride. That’s the key takeout from Kiwibank’s latest economic report released at the end of H1 2024. The report underscores the impact of aggressive monetary policy on New Zealand’s economy, which it says remains weak due to high interest rates which continue to hinder growth.

According to the report, the outlook for 2024 is soft but next year will be better. Inflation is expected to fall below three percent by year-end. And if the economy evolves as expected, then the bank predicts the Reserve Bank of New Zealand (RBNZ) to deliver its first rate cut as early as November 2024. It’s only when monetary policy is relaxed that the economy will regain momentum.

Similarly, BusinessNZ’s Planning Forecast for the June quarter reveals that any growth the economy sees will be subdued for some time to come, as both business and consumer confidence continues to drop.

BusinessNZ Director of Advocacy Catherine Beard says that forecasting out to 2026 shows things may initially get worse before improving slowly.

“Currently transactions are down compared to the previous quarter, building consent numbers and freight movements are low too. Consumers are spending less, and confidence continues to suffer with the likelihood that interest rates will remain at elevated levels for longer than anticipated.”

For Kiwi small and medium-sized enterprises (SMEs), the current economic climate is fraught with challenges amidst a backdrop of still much economic uncertainty. As businesses navigate fluctuating consumer spending, subdued growth forecasts, and evolving regulatory landscapes, resilience and strategic foresight are crucial to weathering these turbulent times.

New Zealand’s economy faces a critical juncture marked by uneven impacts on SMEs across sectors. Beard says that current economic indicators reveal a flat market with reduced transactions, cautious consumer spending, and persistent challenges in key sectors like manufacturing. Despite these obstacles, there are glimmers of hope. Beard points to inflation nearing the Reserve Bank’s target, high levels of net migration taking heat out of our labour market and favourable movements in dairy and oil prices, suggesting potential economic upswings in the medium term.

Nathaniel Keall, Economist at ASB, says that their base case is for the economy to hit a trough in the middle of the year, with growth to begin picking up thereafter. “Obviously there’s a big chunk of uncertainty there though – if inflation proves more resilient than we expect and the Reserve Bank doesn’t feel comfortable cutting the OCR for example, the risk is things could stay soggy for longer.”

Keall says that the practical implications of economic challenges for SMEs are many, and unevenly felt. “The downturn has prompted many businesses to reevaluate their cost structures and debt management strategies. While some sectors like manufacturing have seen prolonged downturns, others in service industries have shown resilience.”

For businesses looking for advice on navigating the white-knuckle ride, Keall advises oweners to prioritise cost efficiency and to be prudent when it comes to appropriate debt burdens. “It’s a tricky environment for businesses facing this challenge – investment can reduce costs and boost productivity in the long term, but can sometimes carry a sizable up-front cost in the current environment, particularly if debt funded. It’ll be important to think carefully about the trade-off between those two things when making investment decisions.”

Simon Bridges, CEO of the Auckland Business Chamber, agrees that cashflow is a big issue. A bigger company is late in paying or doesn’t pay [a SME] at all, and then they can’t pay their bills either, and so it goes on. Additionally, clients and consumers just aren’t shopping, eating, getting the services they don’t need to at the moment. This really hurts.

“Of course, all of this is generalisation, and there are pockets doing well. If you are in technology for example you still seem to be in pretty strong demand, additionally financial services seem to be going well.”

Bridges underscores the chamber’s role in supporting SMEs. “We recognise the varied impacts of the economic slowdown on businesses. Cashflow remains a critical issue, exacerbated by delayed payments and reduced consumer spending.” The chamber has responded with practical support measures. “We’ve established a dedicated helpline, conducted webinars on business resilience, and facilitated networking opportunities to foster collaboration and support among SMEs.”

“In terms of government [support] and the future, my perspective is that by the end of the year things will be palpably better. I say this because I think interest rates will come down and the new government’s pro-business reforms will have picked up pace. On this basis I am what I call ‘realistically optimistic’. I think the main thing government can do is provide a sense of a plan for the future which provides hope and optimism. People want to know what’s coming in terms of things which will generate growth and productivity. People want light at the end of the tunnel.”

On this, Andrew Bayly, Minister for Small Business and Manufacturing, emphasises the government’s commitment to SME resilience. “Small businesses are the powerhouses driving the New Zealand economy, contributing significantly to GDP and employment. Small business accounts for 97 percent of New Zealand businesses and also contribute 37 percent of all economic value add in New Zealand. Furthermore, manufacturing underpins 60 percent of NZ exports and employs approximately 250,000 people in a range of sub-sectors. SMEs and manufacturers are vital to New Zealand’s economic success. As government, our focus is on initiatives that foster digital transformation, streamline regulatory compliance, enhance access to capital, and build business capabilities.

“Since assuming office I have convened two groups of industry leaders representing the SME and manufacturing sectors. Together we have focussed on identifying specific initiatives I can progress quickly and which offer the highest impact,” explains the Minister.

Initiatives such as mandated e-invoicing adoption by government agencies and efforts to streamline data collection aim to reduce bureaucratic burdens on SMEs, promoting a more conducive business environment.

In navigating economic uncertainties, SMEs are urged to adopt proactive strategies to fortify their resilience and capitalise on emerging opportunities. Keall advises, “Reviewing overheads, negotiating favorable payment terms with suppliers, and optimising inventory management can help mitigate financial pressures.” Bayly encourages SMEs to leverage government resources such as the New Zealand Business Number (NZBN) and digital tools offered through platforms like business.govt.nz: “These tools not only streamline operations but also enhance visibility and access to government support schemes.”

Bridges emphasizes the importance of forward planning: “SMEs should seize opportunities for upskilling and digital transformation. Our chamber initiatives aim to equip businesses with the tools and knowledge needed to thrive in a digital economy.”

Expert insights and advice

Andrew Bayly on Government Support: “Our ongoing dialogue with SME leaders has highlighted the need for practical solutions. Initiatives like the Smart Industry Readiness Index (SIRI) are instrumental in helping manufacturers adopt Industry 4.0 technologies, enhancing productivity and global competitiveness.”

Nathaniel Keall on Economic Outlook: “While uncertainties persist, we anticipate a gradual economic recovery post-trough in the middle of the year. Factors like inflation dynamics and potential Reserve Bank actions will influence the pace of recovery, affecting business confidence and investment decisions.”

Simon Bridges on Chamber Initiatives: “We’ve tailored our support to address immediate cashflow concerns and long-term resilience. Our partnerships with industry experts and mentoring programs aim to equip SMEs with the skills and networks necessary to navigate economic challenges effectively.”

As New Zealand’s SMEs navigate the complexities of an uncertain economic landscape, agility and strategic adaptation will be pivotal to their survival and growth. With cautious optimism for economic recovery, businesses are encouraged to capitalise on government support initiatives, enhance operational efficiency through digitalisation, and cultivate resilience through strategic partnerships and proactive financial management.

Over the next several months, NZBusiness will take a deeper dive into investment and cashflow strategies to help SMEs better navigate the current economic roller coaster, including a special digital issue to be published in September.