BNZ Economist Tony Alexander’s NZ Observer – June 2015

[caption id="attachment_3709" align="alignleft" width="150"] Tony Alexander, BNZ economist.[/caption]

In this month’s NZ Observer we make a suggestion for how course providers can get more SME owners showing up to improve their skills, discuss the Reserve Bank’s recent easing of monetary policy and note more is likely, examine the weakening NZD and also note more is coming. However our economy still retains good support from areas like construction, migration, and household spending so the extent of the NZD’s decline is likely to be limited. We also make some rough calculations aimed at indicating which regions of the country have a housing shortage – only a couple by the looks of it.

SUMMARY There are plenty of courses available for small business owners to take. But the sign-up rate is very low. How might one better encourage owners to engage with course providers? Perhaps not by emphasising the potential business growth benefits, but instead by highlighting failure and simple ways to avoid it. The Reserve Bank has eased monetary policy and will do so again as falling dairy prices and a still slowing Chinese economy worsen the country’s economic outlook a tad – by perhaps enough to warrant undoing at least half and maybe all of last year’s 1% cash rate increase. But how will the Reserve Bank offset the extra stimulus to the Auckland housing market? More lending controls look highly likely, and eventually foreign buying restrictions as well. The Kiwi dollar has recently traded below US 70 cents for the first time since the middle of 2010. Further depreciation is likely but a substantial drop looks off the cards as although US monetary policy looks likely to be tightened, the lesson NZ provides from 2010-11 and again from 2014-15 is that such tightening may not be sustained. Plus our economy retains good support from construction, migration, and household spending. The Power of Loss Recently I attended a gathering at which the Minister for Small Business Craig Foss invited discussion from participants in the small business sector regarding their concerns. A number of things came up ranging from concerns about compliance costs – something which increasingly irks businesses of all sizes – declining labour availability and increasing dependence upon overseas backpackers who need to be trained, then leave, and more training of new ones is then required. There were concerns expressed about taxation, and how the language used by government and business course providers and advisors was often not that used by the owners themselves – “governance” for instance. One strong area of focus was the way in which small businesses tended to stay small, sometimes through not having the skills needed to get bigger, lack of desire, weariness to accept outside capital and direction and so on. Related to that there was hefty discussion about the low participation by small business owners in the large and still growing number of special programmes being set up for them to learn business skills. An example was given of almost 300 small businesses being referred to one particular course, but only four taking it up. One reason cited for this lack of participation was simple lack of time to attend a course. Another reason expressed was that businesses are not convinced of the need to develop new skills so they can take themselves from having the ability to start up a business to running it well, then to growing it. One might think that a way to try and get higher small business participation in courses would be increased advertising of them. But consider what such advertising for the past quarter of a century has done to our personal willingness to boost savings for retirement. Nothing if the statistics are anything to go by. As Kiwis we so love borrowing money that the continuing trend decline in interest rates underway since the early 1990s has easily dominated any nods we have given to those letting us know that it would be a good idea to boost our long-term saving. In fact looking at the graph below one cannot conclude that we willingly save more. The negative savings rate only became less bad once interest rates really started going up over 2006 into 2008, and after that one could put the movement into positive territory (a miserable +2.1%) down to the shock of the Global Financial Crisis. Not TV ads. So what might be a good way to get more small business owners to take courses? One idea is this. As humans we are over three times more sensitive to the loss of a thing than the gain of a thing. If we make $100 we feel it is only natural we do so as we think we are reasonably clever. If we lose $100 we feel stupid and question our own competence in a sometimes deep soul-searching exercise. Hence, in the 1990s and 2000s when finance companies were attracting deposits from banks they were not saying to potential clients that they should come to them and gain an extra 2%, but warning that if they did not shift their business they would lose 2%. In one fell swoop the finance companies hit not only our higher psychological exposure to loss than gain, but also our deep-seated FOMO driver – Fear of Missing Out. This FOMO driver is very strong in our teenagers, and we had just reached the point in the Auckland housing cycle, by our estimation, where FOMO was becoming a strong force. That is, inexperienced, under-capitalised people were entering the property market as investors, attending courses and evening seminars not driven by greed but by a fear of missing out on what the media keeps telling them are easy gains. If something is on the front page of the country’s biggest newspaper most days of the week you are going to tend to believe it is true and want to take some action on a thing which clearly is a matter of moment to any thinking person. So how does this relate to small business owners and their reluctance to attend courses? Simple. You don’t tell them what they will gain by attending a course, but what they will lose by not attending. Consider for instance how the courses tend to be promoted

-how to grow your business

-how to handle staff disputes -how to make the most out of a new free trade agreement

-getting your goods into Australia

-simplifying your compliance costs.

To a small business owner their thinking is likely to run along the lines of “I can grow my own business, what can go wrong? I’m not taking any crap and don’t need to be told how to manage my own people. Exporting is too tough so I’ll give that a miss. Getting stuff across the ditch is easy. I’ve got cousins there who can help. My accountant takes care of all that compliance stuff.” Now try these taglines

-Most small businesses close within five years. How to avoid disappearing like the others.

– Five businesses sunk by poor staff management leading to disputes

– how to avoid their failure.

-Each week you’re losing customers. How to avoid losing 1.4 billion of them.

-Telecom, the Warehouse and Ansett couldn’t survive in Australia. What do their failures teach us to avoid when growing there?

-Neglected compliance can wipe out your profits. How to avoid the simple mistakes.

Anyone with a decent marketing background could probably say the same thing in half the words for each of these examples. The aim is not so much to scare people into attending a course, but to let them know what bad things they can avoid by going. In similar vein, when I used to do a lot of tramping and receive the quarterly Federated Mountain Clubs bulletin the first thing I would do for each issue was go to the back and read the accident reports. I wanted to know what went wrong and how to avoid making the same mistake next time I was out in the bush or up a mountain. Knowledge of what could go wrong got me out into the bush more, not less. And again with a tramping analogy, when two inexperienced walkers meet on a track they will talk about the lovely waterfall over there, the beautiful birdsong somewhere else, and so on in gleeful tones. When two hardened trampers meet they’ll casually ask questions about how many in the other party, track conditions further along, latest weather forecasts, other people on the track and so on. Plus maybe then mention the scenery, and sometimes the other persons smell. So, if you are a small business owner reading this and you’ve not signed up for one of the many courses on offer, ask yourself – what am I missing?… Click the download to read Tony Alexander’s full analysis: Download document pdf 540kb