Tuesday, 25 September 2018

Business Confidence and the 'Real' Economy: an Analysis of ANZ surveys and the views of Treasury

The ANZ Business Confidence survey -- more properly called the ANZ Business Outlook survey --   has become something of a regular political football since  Labour-Coalition formed the Government in September last year. But few using its results, generally to support their political position, ask about
the methodology used and whether the information can be considered useful and reliable.**

The ANZ survey is unusual. It samples opinion like most other surveys but those  questioned are not chosen randomly. It is an opt-in survey in which ANZ invites businesses to participate.

'Keen to take part? If you would like to be part of the ANZ Business Outlook survey, please email nzeconomics@anz.com, giving your email address, industry and the major region you operate in, we would love to hear your views."

The survey itself and each question is optional. A reminder email is sent a week prior to the survey but no attempt is made to encourage non-responders to respond, and no follow ups follow. ANZ admits this can lead to self-selection bias:

essentially, the firms with the most firmly held opinions may be more motivated to respond in any given month... This may help explain the tendency for the headline business confidence measure to be higher/lower depending on which political party is in Government."  

And so it is, as the graph below shows. Uncertainty preceded the September 2017 election and the formation of Labour-Coalition government in October. Business "Confidence" wavered,  then plummeted, and "Own activity" also fell but was still just in positive territory.


The survey is also unusual for the small size of its sample.  In 2017 there were 560,000 geographic business units in New Zealand. ANZ samples 1,500- 2,000 businesses which have opted-in to its survey, but only 300-400 choose to  respond in a given month. This compares with the 1,000 plus typical of most opinion polls, including Colmer Brunton. (See my postings pn24, pn25 and pn26 on poll methodologies and likely accuracy.) I would prefer a larger random sample. The survey, however, does seem to match NZ's total businesses with respect to sector and location, and its methodology presumably meets its purpose. 

To quote again from the ANZ website,

"This document is intended for ANZ’s institutional, professional or wholesale clients, and not for individuals or retail persons. It should not be forwarded, copied or distributed. The information in this document is general in nature, and does not constitute personal financial product advice or take into account your objectives, financial situation or needs."

That said,  its actual use by the media seems to far exceed its reputed intended use. A further ANZ disclaimer may be necessary. 

On the two main questions, I'd accept ANZ  claims for accuracy but I'd be most cautious of answers on its 17 variables from such a small number of businesses.

The two main questions, the first general, the second specific, asked are:

  • 1. "With respect to the New Zealand economy, do you expect that General Business Conditions in 12 months time will have improved, remain the same or deteriorated?"
  • 2. "With regard to Your Business, how do you expected the following variables to have changed in 12 months time (improved, remain the same, deteriorated): Unemployment rate. Interest rate, Real Business Activity. Real Profits. Employment, Price of your good/services in three months time, Investment in buildings, plant, equipment?"

ANZ does not publish figures on 'remain the same' but these may be obtained on request. I'm not altogether happy with the common diffusion index equation that makes allowance for the omission (Improved minus deteriorated divided by improved plus remain the same plus deteriorated  multiplied by 100) but I can't see a better way to count them --  except perhaps by using trifactor graphs--  and the number or percentage of 'remain the same'  should be stated.

ANZ accepts that answers to question 1 are likely to be biased, but states that its results on question 2 match those of the county's GDP. My guess is that it is reasonably accurate indication of business opinion on both questions, but business opinion is a poor measure of the actual economic situation.

One further point, surveys should always be considered in the context of what else is happening at the time a survey is conducted. Towards the end of the survey duration Jacinda Adern announced that a Business Advisory Council would be established under the chairmanship of Air NZ CEO Christopher Luxon. Had the survey been a week later, its results may have been at least a little more favourable.

The ANZ Ray Morgan Consumer Confidence Survey

Finally, although the media seldom mentions it, ANZ conducts another survey, on consumer confidence, jointly with Roy Morgan.  The results for August showed that  

 "Consumer confidence was little changed, sitting around its historical average.  Households are upbeat about current conditions but remain a little cautious about the outlook. Disquiet is focused on prospects for the broader economy over the next 12 months rather than households’ own finances, in what is likely an echo of weak business confidence survey results. "

In other words, consumer confidence was upbeat to steady, and business confidence "with regard to your business real business activity", as shown in the above graph, was down but still in positive territory.  Only the politically-influenced general "Business confidence" was in negative territory. 

The consumer survey, as noted, was not reported in the media, while pointing out the negatives in the business survey.

The longer 14-year view provided in this graph is interesting.  Note the volatility, the sharp drops in confidence with elections, all won by National, in 2008, 2011 and, to a lesser extent, 2014 and the general recovery following. Had the  ANZ August business survey been conducted a week later, after Adern announced a limit on wage reviews and the Appointment of the Business Advisory Council, the result could have been very different. We will have a better idea after the the next few surveys -- if the media present happenings in a more balanced manner.

ANZ Ray Morgan do not publish the survey methods but they would appear to be more usual than the opt-in Business surveys. Some 1,000 adults are randomly chosen from the total number (or number of households on line). Unlike the ANZ Business survey, statistical conclusions can be drawn from its findings.

I assume ANZ does not conduct  its business surveys using the same methodology because it would be more expensive and because they are satisfied the opt-in method suits their purpose just as well. They seek indications; not statistical probabilities.

To see how realistic the surveys are, we need to turn to Treasury for more fully informed opinion based on an assessment of economic facts, and less influenced by the political leanings of those surveyed.

What does Treasury have to say that  make us more or less confident in the future?

Treasury stated  that "GDP has slowed over the past year from 4.0% to 2.9% in the year to December 2017 and is expected to remain around these rates over the first half of 2018. Thereafter the demand outlook is broadly positive with activity underpinned by low interest rates, migration-led population growth, rising government spending and robust international growth."

"Annual average growth is forecast to pick up from 2.8% in the June quarter 2018 to a peak of 3.6% in the December 2019 quarter, as private consumption growth remains solid, increased government spending bolsters the economy, and both residential and business investment pick up. Growth is expected to slow to 2.5% by June 2022 as net migration inflows ease, and interest rates rise."

"Growth is expected to support a gradual decline in unemployment but also add to capacity pressures in the economy, contributing to rising inflationary pressures and increases in interest rates. International growth underpins demand for New Zealand exports and supports a historically high level for the terms of trade over the forecast period. The combination of the profile for real activity and the upwards pressure for prices results in higher nominal gross domestic product (GDP) across the forecast period."

"Changes in the outlook since the Half Year Economic and Fiscal Update 2017 (Half Year Update) reflect recent economic data, new government policies and changes to some key judgements. Revisions to historical data raise the starting point for GDP growth but show a greater slowing of momentum over 2017. Employment has continued to expand with unemployment falling more than expected. Increases to government spending mean that while still easing, growth in government consumption adds more to demand. An increase to the Treasury's long-run net migration assumption means population growth supports economic growth more in the later years of the forecast."

In conclusion, Kiwis won't be paddling around in a swamp. We seem to be on reasonably dry high ground.  The dire predictions of the ANZ  Business survey need to be seen together with those of the Consumer survey. Both need to be compared with the predictions of Treasury --  and  media reports should be more informed and balanced.

** My thanks to ANZ for their assistance in helping me better understand the surveys while drafting this post. Their assistance should not be taken to mean that they agree with my opinions."


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