Challenging times for New Zealand businesses

The reopening of New Zealand’s international borders on 31 July 2022 is expected to revive the hospitality sector and alleviate the skills shortage in the labour market. This is welcome news. At the same time, however, New Zealand businesses are facing substantial challenges. That leads many business owners to wonder what the next twelve months will hold and how best to navigate this ever-changing landscape.

New Zealand has seen inflation of 6.9% in the last quarter – the highest its been for 30 years. The Reserve Bank of New Zealand (RBNZ) is doing its best to keep inflation in check by increasing interest rates rapidly. As a result, commercial loan rates have increased to around 5.5% – 6.5% depending upon the borrower’s risk profile and will likely continue to increase.

Economists estimate that business operating costs (excluding labour) rose by more than 8% over the past 12 months. There doesn’t seem to be any immediate relief in sight with high energy prices and global supply chain disruptions set to continue. At the same time wage inflation has risen to its highest level since the global financial crisis as businesses struggle to attract and retain staff. Human resource shortages are expected to persist in the short-term, so businesses are likely to continue to see their labour costs rise.

The above factors are putting pressure on cashflows and profitability. However, there are a number of steps businesses can take to lessen the impact:

  • Ensure you have a budget to keep track of your finances with a particular focus on cashflow. Review, understand, and challenge every material item of expenditure. Determine whether there are lower cost alternatives that won’t impact the quality of your product.
  • Consider increasing your prices, perhaps in small increments over time rather than one large jump. Make sure your customers understand the value of the product you are providing which will make a price increase more palatable.
  • Review the interest rates on your debt and actively look at refinancing if required. Make sure any forecasts or cashflows provided to lending institutions are robust and based on justifiable assumptions.
  • Review your business’s systems and processes with the aim of increasing productivity. Identify areas that are inefficient and eliminate or improve them.
  • Reconsider where you invest surplus funds. In a high-inflation environment having cash in the bank means you are losing money. Look for assets that offer a higher rate of return whilst still offering a relatively low level of risk.

Despite the challenges facing New Zealand businesses, economists predict that the economy will grow around 2.9% in 2022. The opening of our international borders and the continued removal of COVID-19 restrictions will help revive the tourism and hospitality sectors. A buoyant labour market, strong commodity prices, and accumulated household savings should help support domestic activity. As a result, economists are expecting a slowdown rather than a recession.

If you need help navigating the challenging economic environment please contact Greg James at Findex.