Business Outlook

February 2009

The "dilemma"

2009 has started how 2008 ended. Businesses remain downbeat. A net 41 percent of businesses expect worse times over the year ahead. This is down 6 percentage points from the final read of 2008.

The messages across the survey remain sombre — a term with perhaps optimistic connotations, given the aggregate picture. Firms’ own activity expectations improved a tad, but with a net 20 percent expecting worse times for their own business over the year ahead, the improvement is one of shifting from the worst on record to the second worst. Sentiment within the retail sector remains uniformly pessimistic with a whopping 52 percent expecting worse times ahead for their own business over the coming year.

The mover and shaker in this month’s survey is employment intentions. A net 29 percent expect fewer staff over the coming year, a 7 percentage point jump (deterioration) from the end of 2008. With the exception of construction, employment intentions are uniformly worse across all sectors and either at or close to historical lows. Likewise, investment intentions hit a new low, with a net 15 percent expecting to reduce investment over the coming year. These are key supply-side inputs that tell us the downturn has moved beyond firms seeing lower sales, with businesses now having to respond themselves via less productive capacity. That means less investment and fewer jobs.

Across other survey indicators, profit expectations were up (or less negative) by a marginal amount but still perilously low, with a net 41 percent expecting lower profits over the year ahead. Export intentions eased from plus 9 to plus 4. Views towards the unemployment rate have reached a historical high, with 87 percent expecting it to increase. Pricing intentions remain low, supporting continued expectations of interest rate cuts. One-year ahead inflation expectations have eased from 3.2 percent to 2.7 percent, a level not seen since mid-2004.

Against the backdrop of stimulus in the form of aggressive interest rate cuts, a falling currency and fiscal stimulus, it is perhaps disconcerting to see the aggregate message from the survey remain so poor. Indeed, we’ve had to rescale the chart (again) that shows our composite growth indicator from the survey versus GDP. At current levels, it’s consistent with sub -2 percent growth. Ouch! The recession that started in early 2008 has yet to trough, let alone show any signs of recovery.

It’s clear that the economy faces deep-rooted challenges. The most significant is from offshore, with the global economy deteriorating by the day, as the ripple effects from the biggest financial crisis in eighty years extends beyond the financial system and into the real economy, spending, investment, and jobs.

Yet, the current downturn is not only a reflection of economic dynamics. It’s rapidly becoming a symptom of game theory, as behavioural aspects to the economic cycle take over. No one is doubting the economic challenges ahead and the scale of developments. But there are non-linear and behavioural (animal spirits, bulls, bears, etc.) aspects in every economic cycle.

The most widely referred to example of game theory is the prisoner’s dilemma. Two suspects are arrested by the police. The police have insufficient evidence to convict. After being separated, both prisoners are offered exactly the same deal. If one testifies (defects) against the other and the other remains silent, the betrayer goes free but the silent partner in crime receives a 10-year sentence. If both remain silent, both prisoners are sentenced to only six months in jail for a lesser charge. If each informs on the other, each receives a five-year sentence. Both suspects must choose to dob-in the other or remain silent. How should the prisoners respond?

The “dilemma” faced by the suspects is that, whatever the other does, each is better off confessing than remaining silent. How does that work? If you both cooperate, you (yourself individually) could have done better by defecting and dobbing in your accomplice. If you both defect, it’s not pretty, but better than an outcome of staying silent yourself and seeing your accomplice defect. The general principle is that the outcome obtained when both confess is worse for each than the outcome they would have obtained had both remained silent. In such instances the rational choice leads the two players to defect, even though each player would benefit more if they played co-operatively.

And so it extends to the economy. The rational or optimal solution is for all to hold our breath (co-operate) and ride through the biggest global downturn of our time. Don’t pull down the shutters for fear of making it worse. Unfortunately, simple game theory, individual circumstances and human nature suggests otherwise.

Survey Results

The table can be viewed as charts on our Business Outlook charts page.

If you would like to become a respondent to our survey, send an email to economics@nbnz.co.nz with your business location and industry sector. For details on the nature and performance of the Business Outlook please refer to this file:
www.nationalbank.co.nz/economics/outlook/pdf/BOBackgroundPaper.pdf.
This background paper also contains enrolment forms for new survey respondents.

This material is provided as a complimentary service of The National Bank of New Zealand, part of ANZ National Bank Limited ("Bank"). It is prepared based on information and sources the Bank believes to be reliable. Its content is for information only, is subject to change and is not a substitute for commercial judgement or professional advice, which should be sought prior to acting in reliance on it. To the extent permitted by law the Bank disclaims liability or responsibility to any person for any direct or indirect loss or damage that may result from any act or omission by any person in relation to the material. material.