Skip to content

What confidence can we have in “business confidence”?

‘Business confidence’ is falling and we should be very concerned, we are told. But is ‘business confidence’ really falling and is it anything more than an opinion poll of some chief executives as to what they think of the Government of the day, or their impression (which may not be any more accurate than yours or mine) of where the economy is going?

Do ‘business confidence surveys’ tell us much about the real state of the economy? The international evidence is weak. It also depends on the poll you choose. General business confidence seems to be largely based on executives’ view of the Government of the day, plus major events like recessions. When the CEs talk about their expectations for their own firm it appears somewhat more soundly based, and can look very different to their general view, but it still is not a reliable predictor of real data. Currently, even Business NZ concedes that business opinion is at odds with reality, and looking back, that is not unusual.

Often business explains ‘confidence’ as the need for ‘certainty’. But business confidence was highest in New Zealand when there was the most uncertainty – amid the huge changes to the economy in the early 1990s. For working people it was a time of high uncertainty: high unemployment, job losses, insecurity and increased casualisation of employment. Yet they need certainty too: to get a mortgage to buy a house, to have children and settle them at the same school and build a network of friends, to progress through their careers at work. In the early 1990s wages were falling in real terms and as a proportion of the income their work created. Company profits were rising. If there can never be ‘uncertainty’ for business, we can never change poor policies: it is an argument to protect a privileged position.

Should we worry? The best theoretical basis for thinking we should be concerned is that when businesses are thinking about investing or hiring new staff they are taking a punt on whether they can increase sales to justify the additional cost. They need to have ‘confidence’ in the prospects for their business. But in practice confidence cannot be directly observed and survey results are affected by many things that may be irrelevant to those decisions. Its relevance therefore comes down to whether stronger investment and employment follows higher confidence ratings. Does it? In general, the evidence is at best weak; often it is just not true.

Too often the assertion of ‘lack of business confidence’ is being used by business and their political allies to try to frighten public opinion against current Government policies. It is not based on rational argument or evidence, nor on what is good for New Zealand as a whole – unless we accept that what is good for business is always good for New Zealand. We should insist on business providing evidence rather than emotional scaremongering.

Download the full bulletin: CTU-Monthly-Economic-Bulletin-201-June-2018