The visible hand in economics

Is the business sector in retreat: An alternative view

Posted on: July 17, 2008

Business and consumer confidence is at concerning low levels. Furthermore, there is now a general consensus that we are in a recession.

However, something feels strange. A boost in petrol prices and a drought are the factors smashing our economy – the drought is temporary and people seem to be responding strongly to the change in fuel prices.

In fact, the value of fuel sales only rose 0.1% over the three months to May, while the price of petrol rose 7.3% and diesel rose 16.2% (thank you MED and Stats). The more that people can substitute away from the use of fuel, the less impact it has on their spending power.

But our focus here isn’t households, its businesses. The rising fuel, energy, labour, and other input costs must be tightening their margins. With consumer spending languishing, there must be blood on the wall – right? I currently feel that it is looking this way, but I’m going to put down a more positive alternative point of view anyway :)

Well, we don’t have any figures on what is happening this second, but the reports I hear from businesses are very mixed. Fundamentally, I get the impression that, for many businesses, a slow down in activity now is not a big deal – the concern is with a slowdown in activity towards the close of the year (around old Christmas time). Currently, many businesses believe that things will be back in order by then: consumers will be buying and interest rates will be lower.

What numbers we do have seem to consistent with this business expectation. Diesel prices have risen far more than petrol prices, while the input cost increases have been largely similar (correct me if I’m wrong here :) ) – as a result, the elasticity of demand for diesel must be much less.

Furthermore, business confidence is recovering (NBNZ) – sure it is negative, but its always negative :)

With business confidence rising, and businesses keeping active there is no reason to expect the labour market to collapse. If the labour market stays robust, there is no reason to expect households to languish in self-pity for too much longer.

If this is the case, we might not see a ex-drought recesssion in NZ after all (by ex-drought I mean, add 0.5 to the March qpc and take away 0.5 from September – so since June is likely to be negative, September growth of less than 0.5% would suggest a excluding drought recession for me – go you rules of thumb).

Is this very likely?

Given the high level of uncertainty out there, I would put a p-value on this of about 35%. So it is about 35% likely that the recession is an aberration. I guess we will see in time.

Update: A similar sort of discussion in the UK context is here (*)

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