Business confidence

I wrote a post last year on why one might or might not care about ‘business confidence’: basically, it’s not of much real interest in itself, but it may be a leading indicator, a useful predictor of short-term changes in employment or investment.  As I said then “Whether a business confidence survey will be economically useful is an empirical question, to be answered by data.”

In light of the new fall in the business confidence survey, it’s worth noting that this question has been answered by data. The answer is “No”.

David Hood has looked at whether NZ business confidence predicts next-quarter GDP. There’s a weak negative correlation: if business is confident, there’s a slight tendency for the economy to get worse in the next quarter. More dramatically, he finds that business confidence from countries other than NZ is a better predictor of NZ GDP than NZ business confidence is.  If you want to know how the NZ economy is doing, it seems you’d be better off asking Chinese or Swedish or Canadian businesses than Kiwi businesses.

One big component of the problem is that business confidence in NZ has been lower when we have a left-wing government led by a female PM. Since the economy has done better  when we have a left-wing government led by a female PM, we get a negative correlation.  That’s not to say that Labour women necessarily run the economy better; most of the variation isn’t something that the government has much control over; it’s not that Helen Clark was holding off the Global Financial Crisis and electing John Key then let it happen.  Still, when business confidence is affected by that sort of bias it’s not going to be as good an economic indicator, and even when you try to subtract off the bias, there doesn’t seem to be much information in the NZ business confidence index. 

You  might ask why I’m believing some random person on the internet rather than the ANZ survey.  It’s not a matter of reputation — we have the analysis, and StatsNZ has the data. Business confidence surveys can, in some settings, be a useful economic leading indicator.  In New Zealand, they haven’t been.