‘Absolute plunge in business profits’ could be just the start of downturn - economist

Many households would be refixing mortgages over the next year, and that would mean further reductions in spending. Photo / Getty Images

By Susan Edmunds of RNZ

New Zealand businesses are feeling more pain than headline data might suggest as profits plummet, one economist says.

The number of businesses operating in New Zealand has been steady, and even lifting a bit, in recent months. In April, there were just over 590,000, of which about 20 per cent were in rental, hiring and real estate services.

But Shamubeel Eaqub, an independent economist, said that stable number hid a sharp drop in profits that was likely to be hurting businesses, and could mean more pain to come over the rest of this year.

He has been tracking real profits per enterprise, a measure that has fallen to less than $200,000 per business, from nearer $235,000 in 2019. It was at its lowest level since 2017 and most of that fall has happened in the past two years.

Profit margins were well below the pre-Covid average.

The annualised rate of 371 corporate insolvencies was the highest since 2013. Eaqub said the rate of court-administered insolvencies was running at about 35 a month, similar to during the Global Financial Crisis.

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“This recession is extremely unusual,” Eaqub said. “Normally you see job losses, real incomes being hit but profits by and large go sideways.

“This time we are seeing an absolute plunge in business profits. In absolute terms, I haven’t seen this in any of my data going back to the early 2000s. We are just at the beginning of the recession in many ways.”

Because of immigration and other factors in the aftermath of the pandemic, the recession had not started biting until the last six months.

Employers had so far cut back on capital expenditure and hiring, and were wearing the downturn via reduced profits, he said.

“We haven’t seen the pain of businesses actually cutting back on spending - it’s been postponement so far, rather than running out of money.

“That’s why we’re not seeing a decline in enterprise counts yet - but now businesses are running out of cash, that’s what the profit margins are telling us.

“We haven’t seen business closures yet because they will use up all their resources first before they close the business, but my sense is this is the really tough period for economic data.

“May to November is when we will probably see the worst of the economic downturn. Not only have businesses been hit hard by profit reduction but costs are still high and we should expect demand to slow further.”

Many households would be refixing mortgages over the next year, and that would mean further reductions in spending, he said.

“If you look at retail spending per capita, the recession is already looking pretty impressive.”

The Reserve Bank, compared to other central banks, was less tolerant of inflation risk and more tolerant of recession, job loss and business failure, he said.

It was likely the Reserve Bank would cut later than other central banks, which could cause unnecessary economic pain.

Eaqub expected a recovery next year.

- RNZ