As the New Zealand economy experiences a significant slowdown from a policy-induced recession, local businesses must adapt their strategies to overcome the challenges ahead. A recession is defined as GDP falling over two consecutive quarters. With weakening domestic demand and declining investments, understanding the current state of the economy becomes crucial for sustaining growth and profitability.
According to recent data released by Stats NZ, the consumer price index increased by 6.7 per cent in the 12 months to March 2023, following a 7.2 per cent increase in the previous 12 months. These elevated inflation levels have significant implications for businesses as they grapple with rising input costs, including raw materials, wages, and operational expenses. The Reserve Bank of New Zealand has taken decisive action to combat persistent inflation. The Official Cash Rate (OCR) increased by 25 basis points to 5.50% in May. This OCR is expected to remain stable until mid-2024 before declining. Tightening monetary policy aims to reduce inflationary pressures; however, it poses new challenges for businesses.
Higher interest rates will inevitably affect investment and private consumption. As interest rates increase, borrowing costs rise, discouraging businesses and individuals from pursuing investment opportunities. Higher interest rates can deter businesses from expanding, while those relying on external financing face increased costs. Alongside the decreasing opportunities for growth, domestic demand weakens, and businesses anticipate lower customer spending. Projections suggest that New Zealand's real GDP growth will ease to 1% in 2023 and 1.2% in 2024, with the business sector leading this slowdown. In the three months ended March, the business sector had already contracted 3.5 per cent, this reflects a substantial deceleration in economic activity. According to Stats NZ, the business industries currently experiencing the harshest impacts include management consulting, advertising, and engineering design services. Overall economic contraction poses the threat of decreased revenues and profitability.
What can businesses do in this climate?
Navigating a recession can be daunting for businesses. Strategic responses can help withstand these challenges, maintain resilience, and even thrive in such economic conditions.
Stay open to help; financial advice is valuable.
Consulting with financial experts can provide valuable insights and guidance on navigating these challenges and accessing funding best suited to your business.
Maintain adequate financial management.
Practice sound financial management by closely monitoring cash flow, controlling costs, maintaining accurate financial records, and efficiently managing debt. These practices can mitigate the impact of high-interest rates and cash flow constraints. Financial management can help you determine cost-saving strategies such as streamlining processes, reducing waste, renegotiating supplier contracts, and leveraging technology to improve operational efficiency.
Adapt marketing and advertising strategies.
Adapt marketing and advertising approaches to economic conditions. Improve targeted marketing efforts, leverage digital channels, and optimise advertising budgets to maximise reach and impact.
Businesses must be prepared to adapt their strategies and make informed decisions in response to the current economic climate: policy-induced recession and significant economic slowdown present challenges. However, by staying resilient, proactive, and strategic, businesses can position themselves to withstand recession pressures and find opportunities for growth and success.