The place to be for a New Zealand SME

By Tony Alexander, Chief Economist

Macro-economists like myself deal with the big picture. We look at trends in commodity prices, consumer and business confidence, trading partner growth, inflation and so on and try to forecast where things will go. If we have time we will work out the likely implications for different groups.

For instance, we might address the interests of farmers by pointing out that rising interest rates in the United States will push the NZ dollar down (good for exporters), but the strong NZ economy will hold it up. We might talk to wage earners and note that the very strong jobs market means you might want to think about asking for a 4% rather than 2% rise this year.

Economic theory and experience of the period from the 1980s to 2007 gives us good insight into such things. But if we truly knew what was going on and truly got our forecasts right, we would not have entire books devoted to jokes about economists.

Sending you the wrong way

Predicting what will happen in the future is difficult at the best of times – just ask anyone who follows any sport. But since the global financial crisis of 2008-09 economic forecasting has been very, very bad. We have been over-optimistic about the pace of growth in the economy and employment, have over-predicted rises in inflation, and invariably been wrong when it comes to picking how much interest rates will move and even the direction of change.

Does this mean we have nothing useful to say to business owners these days? Not at all thank goodness, though things have to be nuanced differently and the way some of us do that is to focus on more than just the economy. We place a lot more emphasis on demographic changes and in particular the impacts of fast population changes.

Navigating without a GPS

Back in the old days before economic data even existed businesses still thrived, investments were made, and people chased jobs. What guided them? They would look for two things – where more people seemed to be going to live, and where infrastructure was being built.

Businesses would look to where a new railway line was going and site themselves in a town along the route. If a port was expanding they would look at boosting logistics operations near it. If people seemed to be shifting to a particular location, they would go there to service them and to get in early before even more people showed up.

How is this relevant now, here in New Zealand? Firstly, we are seeing a population boom courtesy of record net migration inflows, with Auckland the main beneficiary. Thus many businesses are boosting investment in Auckland and peripheral locations like Tauranga, Hamilton, and to a lesser extent Whangarei.

We are also seeing transport networks massively improved south and to a lesser extent north of Auckland, and also north of Wellington. Businesses are investing along the transport routes, people are shifting to newly accessible locations for cheaper housing.

Going in the right direction

This concept of chasing population and infrastructure growth is something a lot of people forgot about in New Zealand as we debated things like the brain drain and chanted “last one out turn off the light” over the 1970s, 1980s, and 1990s. But now migration trends have radically changed, NZ is increasingly urbanising in existing large centres, and infrastructure is undergoing a huge period of catch-up investing.

For SMEs what this means is the following. The outlook for NZ growth is good on the back of booming tourism, construction, migration, strong household spending, business investment, and extra government spending plus tax cuts likely to result from growing fiscal surpluses. But in relative terms growth is going to be best for those businesses which correctly position themselves for where new infrastructure developments are taking people, and where migration flows are delivering the greatest population growth.

So take a look around you at where new motorways in particular are going. Consider the effect this will have on where people live to access affordable housing, and ask yourself whether you are adequately factoring these two new sources of business operating environment change into your five year plans.