I saw this opinion piece on the RNZ website not too long ago and it made me think so I wanted to explore the concept a bit more and put down some thoughts.

Small business owners across New Zealand are grappling with challenges that, in many ways, surpass those experienced during the 2008 Global Financial Crisis (GFC). Rising operational costs, coupled with a decline in consumer spending, have created a perfect storm that’s testing the resilience of small and medium-sized enterprises (SMEs) like never before.

A Strain on Finances and Well-being

The continuous economic pressures are not just financial but also personal. Many small business owners report significant stress and burnout as they navigate these turbulent times. Confidence levels within the SME sector are declining, reflecting the uncertainty that pervades the current economic landscape.

According to data from the Ministry of Business, Innovation and Employment, company liquidations have surged by 40% in the first eight months of 2024 compared to the same period last year. Industries such as construction, retail, and hospitality are among the hardest hit, facing the dual challenges of escalating costs and decreasing consumer demand.

Comparing 2008 and Today: A Different Economic Climate

During the GFC, the crisis was rooted in excessive risk-taking within global credit markets. In response, central banks worldwide, including New Zealand’s Reserve Bank, lowered interest rates to stimulate borrowing and spending. The Official Cash Rate (OCR) in New Zealand dropped sharply from 8.25% in July 2008 to 2.5% by May 2009. This reduction provided relief to mortgage holders and encouraged consumer spending, which in turn supported businesses.

Additionally, the government’s proactive measures included increased capital spending and support for SMEs. New Zealand also benefited from a booming Chinese economy, which significantly increased demand for our agricultural exports. These factors combined to place New Zealand’s per-capita GDP performance among the best in the OECD during that period.

Today, the situation is markedly different. Instead of spending our way out of trouble, the focus has shifted to austerity measures aimed at curbing inflation. High inflation rates have led to increased interest rates, prompting consumers to tighten their belts. A recent survey indicated that consumers in Australia and New Zealand have reduced their spending at SMEs by 60%—the highest reduction among all regions surveyed.

Challenges Unique to the Current Crisis

Several factors contribute to why the current economic challenges may be more severe for SMEs than those faced in 2008:

  • Reduced Consumer Spending: With the cost of living on the rise, consumers are cutting back on non-essential purchases. This shift affects retail and service-oriented businesses that rely on discretionary spending.
  • Rising Operational Costs: Wages, materials, rent, and borrowing costs have all increased. SMEs are finding it difficult to pass these costs onto customers without risking further declines in sales.
  • Limited Government Spending: The government has implemented significant cutbacks, including reductions in public service jobs, to control inflation. This reduction in spending can lead to decreased demand for goods and services offered by SMEs.
  • Lack of Safety Nets: Many small business owners have personal assets tied to their businesses, such as using their homes as collateral for business loans. This personal financial exposure makes closing a business a last resort, leading many to operate under severe strain.

The Silver Lining and Future Outlook

There are pockets of resilience. Certain sectors, like technology firms and construction companies in specific regions, continue to see demand. Shifts in consumer behavior have also led to increased spending in suburbs, malls, and online platforms, offering opportunities for businesses that can adapt quickly.

Recently, a slight drop in interest rates has injected a bit of optimism into the market, with business confidence reaching a 10-year high in September. This change could signal the beginning of an economic turnaround, but the outcome remains uncertain.

What Can Be Done?

For small business owners, navigating this challenging environment requires a multifaceted approach:

  • Cost Management: Scrutinize expenses to identify areas where costs can be reduced without compromising the quality of products or services.
  • Adaptability: Pivot business models to meet changing consumer demands. This could include enhancing online presence, offering new products or services, or targeting different customer segments.
  • Advocacy: Engage with industry associations and government bodies to advocate for policies that support SMEs, such as access to affordable financing and initiatives that stimulate consumer spending.

The Role of Government and Policy Makers

There’s a growing call for the government to balance its fiscal policies with measures that support SMEs. Investment in infrastructure, science, innovation, and exporting can provide the necessary boost for small businesses to thrive. Providing a supportive environment is crucial to prevent a prolonged economic downturn that could have lasting impacts on the SME sector.

Final Thoughts

The challenges facing New Zealand’s small businesses are significant and, in some respects, more daunting than those during the GFC. However, with strategic planning, adaptability, and support from the broader community and government, SMEs can navigate these tough times. It’s essential for all stakeholders to recognize the critical role that small businesses play in the economy and to work collaboratively towards sustainable solutions.