After six economic cycles, SME Director and seasoned NZ business advisor Geoff Hamilton knows that a downturn is no reason to panic. Business owners CAN be prepared for a downturn in the economy. We talk to him about some of the things NZ business owners can do to prepare, and the NZ economic outlook of 2023. He also shares some insight on whether there might be opportunities for NZ business owners to grasp in the next 12 months.
It feels like there’s a lot of bad news around the NZ economic outlook – it’s all doom and gloom. How worried should we be?
Let me start by saying that as a NZ Business owner I’ve run my business and invested through several economic cycles. Believe me when I say there have been some nasty recessions. For instance, the 1987 Sharemarket Crash and the Global Financial Crisis are the big ones that come to mind.
Although there will be pain ahead, this downturn is different to those two because of the employment situation. This is because people aren’t being laid off. In other words, if businesses start to make workers redundant, there are plenty of other NZ businesses screaming for more workers. Thus, I don’t see this market as having the same dramatic effect on our NZ economy as the ‘87 crash and the GFC. I expect that despite people generally being able to get jobs, we will still get some businesses failing.
If people are still employed, what might lead to an economic downturn next year?
Well, the difficult truth is that the rising mortgage rates are going to hit NZ households hard next year. As older Kiwis will remember, although high interest rates are painful, they can be managed. For example, back in the day, we coped with interest rates of 7%, 10% or higher by cutting back on other things. Although we can all admit that house prices were a lot cheaper then, in essence, the same goal remains – get rid of unnecessary spending.
Consequently, when customers cut back on spending, that flows through to NZ businesses. In other words, as people spend less, businesses have fewer customers, and subsequently, growth for NZ Businesses will be harder to achieve.
What can NZ business owners do to prepare for next year?
Although it does look as though 2023 will be tough for NZ businesses, people should prepare themselves for that now.
Building my business in the 1990s, for instance, was tough. In fact, I just kept working my arse off and I managed to grow the business continually. For the most part, that’s what business owners have always done, and that’s what a lot of people will be doing next year.
Furthermore, if your business is making a profit now, you should be thinking about how much buffer you have in case of a downturn. Right now, putting together a war chest of cash to help you survive could be quite important. Such savings will give you the resources to weather some poor months of trading ahead. Unfortunately, failing to save in the good times was a big reason that some NZ businesses didn’t survive covid.
As a business owner, you also always have to be prepared to cut your cloth when times get tough. And in some instances, that might mean lay-offs in the worst case. I would also argue that based on the NZ economic outlook for the next 12 months if your business can’t afford to pay your team members a proper wage, there’s a strong case to be made that you shouldn’t be in business.
What’s the toughest part of running a NZ business in an economic downturn?
Without a doubt, the toughest part of running a NZ business is maintaining your cashflow – and I can see that being a problem next year. This is because during an economic downturn either clients or customers don’t pay their bills, or they take much longer to pay. If I was in a business that doesn’t get paid until after a job is completed or a product is delivered, for instance, I’d be looking to change my payment terms. Asking customers for upfront deposits may also be a useful alternative to get your NZ Business through.
What about investors facing falling balances?
In summary, the basic message is exactly what you’ll be hearing from your KiwiSaver provider or fund manager: don’t panic. Panicking due to the NZ economic outlook and selling out in a downturn can lock in your losses. So, hold your nerve! Previous cycles have taught us that downturns and recessions are usually followed by recoveries and then booms, which is precisely where you really grow your wealth.
Are there any upsides to a potential recession?
In short, most great investors and NZ business advisors will tell you that they made their money buying in downturns, whether that’s property or shares. Personally, I feel that given the NZ economic outlook for next year, the best opportunities in any upcoming recession will come from the share market. This is because property has only fallen by about 10% to 15%, whereas shares have fallen by over 20%. That means that given the nature of economic cycles, when the market turns and prices start to increase, shares have more room for growth. In fact, I’ll be looking for opportunities to buy shares next year.
We can help you weather the storm
If you are wanting to equip yourself, we have recently shared a lot of great articles for NZ Business owners which you can access here. Xero has also recently shared a NZ Business Guide on “Recession-Proofing your Business” which you might find useful.
Economic cycles come and go. So let us reiterate Geoff’s point above, it is not time to panic but to prepare. So, if you are a NZ Business owner looking for experienced Business Advisors – we are here for you! Whether you need help identifying unnecessary costs or are looking to make your business more efficient, reach out to us today.
Together we can achieve more!