Economic slowdown or slow recovery risks

BDO New Zealand Risk Landscape Report 2024

Executives globally say an economic slowdown or slow recovery is one of the four risks their company is least prepared for, according to the BDO Global Risk Landscape Report 2023. This risk has been exacerbated in the wake of the COVID-19 pandemic, where lockdowns reduced demand for many goods and services, resulting in economic loss and workforce cuts. Our latest six-monthly BDO Business Wellbeing Index report (released November 2023) shows this risk is reflected locally, with external economic pressures the second-highest contributor to negative wellbeing in business lives. 

Interest rates and inflation

High interest rates continue to present problems for individuals and businesses. While inflation has slowed - with the consumers price index rising 0.5% in the December 2023 quarter - it remains higher than the Reserve Bank of New Zealand’s target of 1-3 percent.

Ongoing inflation and higher interest rates have led to a drop in consumer confidence, which has a knock-on effect on the business landscape. Household spending was down 0.6% in the September 2023 quarter of Statistics NZ’s gross domestic product data, with spending on durable goods dropping to its lowest level since the pandemic. This top-line impact for businesses is accompanied by higher borrowing and staff costs, further squeezing margins.

High migration levels will continue to have a major impact on New Zealand’s economic outlook. This is positive for the labour market and workforce challenges that have plagued the country in recent years, however the addition of more people - and therefore more spending - to Aotearoa may add further inflationary pressures.  

Political instability exacerbates economic risk

Political instability contributes to economic downturns, especially when it impacts policies and trade arrangements. While New Zealand is isolated and can seem removed from international conflict, situations like the Israel-Hamas warfare, Chinese-Taiwan tensions, and the Russian invasion of Ukraine undoubtedly impact on the New Zealand business landscape.

While China has long been New Zealand’s biggest trading partner, there is some suggestion that our country’s trading relationships could be diversified to avoid becoming overly dependent on the Chinese economy. India and Singapore have been targeted by New Zealand Trade Minister Todd McClay as countries to advance relationships with, which is timely as India is predicted to be the world’s third-largest economy in 2030.  

Closer to home, New Zealand’s election in 2023 and the resulting coalition Government discussion may have contributed to instability, with the international ratings agency BMI downgrading New Zealand’s political stability index score to its lowest rating since 2010 in the wake of the Coalition talks. This may yet influence international investor appetite for New Zealand.

However, with the Government now firmly in place and the December Mini Budget announced, there should be more stability moving through 2024. Immigration to New Zealand has been high in the past two years, boosting spending and easing skills shortages, and the Mini Budget reiterates the Government’s commitment to finding public savings and boosting the economy. Importantly, the flow-on impacts of higher migration numbers continue to bring challenges to infrastructure (such as housing and schools) and essential services (including healthcare capacity). 

Spotlight on supply chains

Supply chain issues continue to be a problem for businesses, especially those that rely on large global sourcing networks. The pandemic revealed how vulnerable New Zealand is to global disruptions and while there was some recovery in 2023, the country’s reliance on imports remains significant. Port and container closures and shortages, shipping schedule delays, and scarcity of imports have all contributed to issues - including extra costs - for Kiwi businesses and consumers.  

Economists are keeping a close eye on the crisis in the Red Sea, with key shipping routes being blocked by Houthi rebels. This is leading to shipping delays and increased costs in what some are saying is the biggest challenge faced by global supply chains since COVID-19. 

Supply chain risks are often exacerbated by extreme weather events, something New Zealand is no stranger to, which can damage infrastructure and affect operations. Now is the ideal time for businesses to re-evaluate their supply chain strategies, building in more flexibility and resilience where possible.  

Businesses that rely on overseas supply chains should also keep a close eye on the implementation of modern slavery legislation and other factors on the ESG (Environmental, Social and Governance) agenda, including carbon emissions and social impact. These will all continue to impact supply chains in the coming years. 

Cascading risk from an economic slowdown

Economic challenges can trigger a host of other risks for businesses, including the obvious potential loss of profit. In turn, this can often force workforce cuts which can create a new set of people risks - the loss of institutional knowledge, deteriorated internal control systems, and the loss of company identity and culture to name a few.  

Critically, an environment of economic pressure often gives rise to an increase in cyber crime and fraud. This pressure can create financial stress, leaving individuals more susceptible to acting on fraudulent opportunities or unintentionally engaging in the schemes of others.  

Tips for business leaders

Despite myriad challenges, there are green shoots on the horizon for business leaders when it comes to economic recovery. Our BDO Business Wellbeing Index shows economic sentiment is improving, likely due in part to the new Government’s focus on economic recovery. And while times are tough, there are actions business leaders can take to mitigate the risks associated with an economic slowdown and slow recovery:

  • Maintain the focus on risk: Normalise the risk management conversation across your business. Whether simple or comprehensive, any structured focus on the threats that exist now, or those that may materialise in time, holds real value. You can only manage what you are aware of. 
  • Know your market: Take the time to understand the current state of the economy, what the near future might look like, and how this impacts your business. Look across your industry to understand the challenges unique to your sector and organisation and consider where there could be opportunities. For example, have competitors exited the market, leaving an opportunity for you to advertise in their space?
  • Plan scenarios: Don’t just focus on what might happen, spending time planning how you will respond if it happens. Build scenario planning into your decision-making process.
  • Rethink your strategy: Review your business strategy in line with the current and predicted economic conditions. Pay close attention to your debt types and levels; it can be tempting to overextend yourself with short-term loans for a cash flow injection, but this can lead to more trouble down the line.
  • Scrutinise your supply chains: Act now to future-proof your supply chains against modern slavery to be ready for legislative change and avoid the ramifications of non-compliance (economic and otherwise).
  • Streamline during slowdowns: Take advantage of slower sales periods by focusing on what you can do to streamline efficiencies and make improvements. Review your finances and see if there are areas where you can save costs, whether that’s in your supply chain or by introducing automation.

For more assistance, reach out to your BDO adviser or learn about how BDO's Risk Advisory service can help you here.

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