By Cameron Bagrie

Here comes the dreaded R with recession calls far and wide. The Reserve Bank formally projected a recession at the end of last year. The New Zealand (NZ) Treasury followed it up with the same.
Firms need to be eying the BIG C, namely cash flow, and not just because of the economy.

Eyes on the cash #1
The latest Quarterly Survey of Business Opinion figures from the NZ Institute of Research (NZIER) point to a recession, as does ANZ’s Business Outlook Survey readings on firm trading activity. Business confidence itself is not a good indicator of growth though. At the same time, pricing gauges (proxies for inflation) remained elevated and BNZ economists viewed the survey results as stagflation (high inflation and no growth) on steroids. Consumer confidence is weak.

Conversely, there is a huge pipeline of work for the construction sector given $32 billion of building consents issued in the past year. Firms cannot find enough staff. Recent weather in Auckland will mean more work, as we move into the fix-it stage. Natural disasters including weather events support growth, though not the kind we like to see.

From an economic perspective, the path ahead is one of simplicity. Years of economic underperformance. Demand needs to be soft for economic balance to be returned. Unemployment will rise. As capacity opens up across the economy, inflationary pressure will ease and balance will be restored. Businesses need to plan accordingly and not get caught up in the noise.

Outperforming sectors will be tourism, benefitting from borders reopening, and those connected to secular trends such as population ageing.

The underperformers will be interest-sensitive sectors including housing, durables goods spending and eventually the residential construction sector in late 2023 and 2024. Taming inflation requires the construction cycle turning down, at a time the sector has a huge amount of work. Eyes on the attrition rate for consents issued with anecdotes of cancellations.

Eyes on the cash #2
The latest bank data gives some insight into business liquidity. Deposits held with banks have moved sideways for the past year. On the face of it, that leveling out implies pressure on profitability which various surveys tell us is set to come under pressure, courtesy of rising costs and expected greater difficulty to pass price increases on. Businesses need to be watching margins. We know that many businesses have also been investing so it is not one way traffic.

Transaction and savings balances have fallen which implies less access to immediate working capital. Some of this appears to be redirected money into term deposits (reversing what occurred over 2020 and 2021).

Eyes on the cash #3
Economic factors are one influence on the cash flow cycle. There are others. One that is often overlooked is the number of workdays over the holiday season which makes for low labor productivity/diminished cash flow.

Many businesses close a few days before Christmas in December resulting in labor productivity and income well below average for December. January GST and provisional tax payments on January 15th place further strain on cash flow. In the month of February there are fewer trading days culminating in a lack of productivity and cash generation for the month.

In late February and March there is usually a lift in sales, but 30-day trading terms means for the majority, cash from debtors doesn’t come in till the end of April. April is another low productivity month – due to the abundance of holidays (Easter, Anzac Day, and school holidays). Instead of the normal 21–22 working days in a month, April only has about 17 – and many employees take holidays with family over the period. And with April 7th being terminal tax day, if you haven’t accumulated cash, results in a liquidity squeeze for the business.

Eyes on the cash #4
A net 67% of firms expect it to be more difficult to get credit over the coming year, near a record low, according to the ANZ Business Outlook Survey. This is a problem on two levels. Downturns offer both opportunities and challenges. Both typically require access to credit.

The risk-weight framework banks operate under does not favour businesses. A housing deal is far easier and less capital costly than a business deal. So, the latter is harder to get through.

I expect the lending landscape to change a lot over the coming decade as alternative providers of credit selectively pick off opportunities, take and price for risk. Banks are pricing for risk but not prepared to take much. Firms cannot just point the finger at lending institutions. They need to have strong bankability too and lift their game on that front.

The bottom line
Cash is not just king, it is super-king at present. We are entering a critical period where reality seems to be hitting home over what inflation means for profitability (rising costs), demand (tougher market) and the need for tougher decisions (managing costs). These are the times that good businesses stand tall.

*While Bagrie Economics uses all reasonable endeavours in producing reports to ensure the information is as accurate as practicable, Bagrie Economics shall not be liable for any loss or damage sustained by any person relying on such work whatever the cause of such loss or damage. The content does not constitute advice.

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