Dollars and sense
By Sandy Galland
Do you understand the relationship between monetary, fiscal and tax policy? Do you understand how these and other influences; like the OCR, inflation, deflation, GDP, CPI, PTA, interest rates and overseas economies impact, either directly or indirectly, on your business?
Wellington Today went to the New Zealand Reserve Bank Governor, Dr Alan Bollard and asked him how the activities of our central bank impact everyday business and, more importantly, does the average business practitioner understand the bank’s role?
Put simply, the role of the Reserve Bank can be likened to a big juggernaut truck, says Dr Bollard.
“This big truck is driving down a motorway and we (the Reserve Bank) are working the accelerator and the brake, but we are not working the steering wheel, that’s a whole lot of other people doing that.
“We are trying to work out what the road’s like ahead, but of course we can’t actually see it. We are forecasting ahead by looking in the rear vision mirror. So that of course is always going to be a bit dicey and as bit of a skill as well,” he adds.
“We would like this truck to move as fast as the road conditions allow, but no faster because that’s dangerous. Or if its going very slowly, not up to what it could be going, then that is not the best either, because it means it is not getting the growth it could.”
So there it is in a nutshell – Bollard and his teamwork between the brake and the accelerator to try and manipulate our economy for the best possible outcomes.
A stable economy
The role the reserve bank has is to do with a number of things to help stabilise the economy and Bollard says the bank is only a part of the government process for getting the best economic performance for our country.
“So what we are trying to do make the economy as stable as possible, in particular focusing on keeping price inflation under control so that businesses can get on, under stable conditions, and make the most sensible decisions to get the best growth they can for themselves.”
Bollard explains the main tool to do this is to move the OCR (official cash rate) around, so that it either slows down the economy if it is running too fast, or to accelerate it if it’s running well below its level.
“We do some other things; we obviously produce the notes and coins you use and we regulate the banks, so that they are sound and New Zealanders can rely on them as stable places to lend their money too and to borrow from.”
Does the small business owner fully understand your role?
“I’m sure they don’t, but should he or she have to?” Bollard asks.
“What I think they need to understand is the government is trying to get a stable environment, so that becomes an attractive growth environment for businesses. In that of course government is doing a lot of other things within a lot of other policies, but that’s happening separately to us. We will however, take that into account when we try and get the most stable economy we can.
When the bank is talking to businesses, what are the re-occurring messages you are hearing?
“Well it’s been a very unusual time. During the second half of 2008 and the beginning of 2009 we had shocking economic and financial conditions of the sort we had not seen before. Not as bad as the 1930 depression, but worse than anything since, and it was also a time most small business owners had not seen before.
“We were all rather worried about what was happening and we all had to look at what were the most sensible things to do. In our case we were just looking for stability in the economy.
“In the case of a lot of business owners, they were worried about their businesses, worried about their markets, worried about their banks getting tough on them. A number of them responded by making sure borrowings were not too high and their asset base was as sound as possible, that they weren’t running unnecessary costs in their business and that they were hunkered down for the duration.
“Now over the last few months we have seen very significant improvements, not just in New Zealand, but around the world. We think we have got through this very bad recession. We think we are coming out but also think that it’s also quite a fragile recovery, so you still have to be cautious. I think a lot of businesses have reached that conclusion as well.
On an individual business level, what can people do for themselves in this current financial climate?
“Generally businesses are surprisingly optimistic. I say surprisingly because it has been a very big shock, but the general consensus is that the worst is over and there are better times to come. But having said that, they’re being very cautious on two fronts, one is on employment, where there is certainly no rush to take on extra staff at the minute so the labour market is still quite weak.
“Secondly on credit; generally businesses, where they can, have been running down their credit requirements, de-leveraging, looking to be much more conservative about borrowing and are not showing much sign of borrowing for increased investment into the future. At some stage that will have to change and we will begin to see more investment, but we are not seeing it yet.
“A lot does depend on the individual businesses and where they are. Are they servicing the domestic market or the export market? Have they been growing rapidly? Have they taken on a lot of debt and so on?
“Those that are tied into markets directly or indirectly with Australia or eastern Asia generally have found they are not doing too badly. Some of those markets have found to be quite strong and the prospects are pretty reasonable as well. On the other hand, those that have relied on US and European markets have taken more of a hit, because those countries have been through much more of a shock.
“The domestic area? It really depends on just which sectors we are talking about. Some sectors, like tourism and some parts of agriculture, like the dairy sector, have been reasonably strong – others, like some traditional manufacturing and some other services, have been hurt by this.
When do you anticipate we might start to see that more growth in borrowing and employment?
“A lot of businesses are saying they are going to get through this year with the capacity, plant and equipment they have currently got. I think they are looking to see growth become reasonably robust through this year.
“While we are getting reasonable growth numbers at the minute, a lot of it still does depend on government stimulus, that’s both on the tax side on the loose monetary policy side.”
