Small businesses hold their own

By ELLEN READ

Small-business activity slowed over the final quarter of last year but the sector still managed to outperform the national economy.

Economic activity rose 0.4 per cent for small businesses in the quarter, as the sector retreated from the highs in the early part of the year, said the quarterly National Bank small business monitor.

Year-on-year sector growth was 5.3 per cent, compared with 4.1 per cent in the economy as a whole.

National Bank chief economist John McDermott said the outlook for the small business sector - which represents 27 per cent of the economy - remained more positive than for the general economy.

The main reason for this, he said, was that the sector was less exposed to foreign fluctuations - the main source of woe for the national economy.

Although individual small companies may have great exposure, a larger proportion of the sector focuses on the domestic economy.

With small firms having a relatively high exposure to the construction sector, the rampant housing market has been a key source of growth, as has robust retail activity due to migration gains, low unemployment and supportive interest rates.

"With the number of new dwelling consents rocketing up to a historical high - a key forward indicator - the outlook for small firms remains solid and the sector will continue to outperform the national average over 2003," the bank said.

The survey of about 1000 small and medium enterprises also shows that regulation remains the biggest problem facing small businesses. In particular, three words strike terror and invoke involuntary spasms - the Resource Management Act, McDermott said.

Although work is being done at a local and central government level to address this concern, progress is slow and the situation means firms are unwilling to undertake capital investment for fear of the act.

It was clear that businesses were not investing enough and, as a result, New Zealand's capital stock was eroding.

Part of this could be put down to a high cost of capital, low national savings and previous poor quality investments.

Other problems included unskilled employees, staff turnover, competition, cashflow and the tax burden.

Survey Results

* Small business gdp growth 5.3%

* Business confidence index -24.4

* Inflation expectations 2.83%

* Source: National Bank