The Effects of the Recession on the Economy of New Zealand - Essay Example

Globalisation and Business Enterprise essay The purpose of this essay is to explore the impact of a global issue i.e. recession on a company in New Zealand. Recession has been affecting economies and companies throughout the world for the past few years and New Zealand companies are no different. Taking the general effects of recessions into account and considering the economic and social studies theories related to recession the paper aims to describe the causes of the effects of the recession. It also analyses the roles of the governments and other organizations in trying to curb the problems. The latter part of the essay stresses on the importance of certain steps that should be taken by the governments or other policy making authorities. Introduction In order to understand the effects of recession on particular companies in New Zealand, it is better to understand the factors that lead to recessions as it would lead to a better understanding of the solutions that would be provided in the latter part of the essay. Recession- the factors and the effects A recession according to King and Cushman (1997) is a term that is used by the economists for different phenomena of problems that could arise in an economy. Generally a recession refers to a time when the overall productive potential of a country (or a region) is compromised. The term recession may also mean that a supply shock is experienced, the increase in GDP/GNP is negative, or the unemployment rate and inflation have increased to a considerable extent. It is important to note that a recession, when it occurs, does not just affect the domestic industry or economy; rather it has implications that are global, as Allen (2001) relates. According to him, the advent of globalization has led the countries to come close together in terms of the international trade. The consequence of this is that the economy of one country has a large and direct effect on the economy of another. Because of international trade, as mentioned above, a global crisis could be caused. An example of a global crisis would be the sub prime crisis that occurred in the US in 2008 as Walden (2008) relates. In accordance with Shankar (2008), the subprime lending fell in the US which meant that the banks and the financial institutions in the US went bankrupt. Because of the uncertainty that was later caused due to the bankruptcy, the investors lost confidence in the US stock markets. The banks were also not able to cooperate with each other and so a ‘liquidity crisis’ was the result. Since the US is a key player in international trade, the bankruptcy at home had implications on rest of the countries too as they had relied on the US markets for profits and hence a global crisis was prevalent. The above mentioned example shows that a global crisis is likely to affect the countries worldwide. The same has been observed recently according to a study carried out by LaBonte and Purcell(2009). Their study shows that the recent global crisis has been characterized by insolvency, bankruptcy, a credit crisis, inflation and unemployment. The recession has affected New Zealand too. A report by the New Zealand Herald (2009) suggests that the recession that has been prevalent in the world for the past four to five years is the worst ever recorded since the 1930s, a time when the economies globally were suffering from the disastrous events that were caused by the First World War. For New Zealand generally the demand for products is decreasing and the markets are characterized by ‘private indebtness, ‘sticky’ unemployment and lingering uncertainty’ according to a report by the OECD (According to OECD, the bounceback may be weaker). This may have serious implications on the economy as the investment may fall and the earnings may dwindle. In fact it the recession has had very great implications on certain companies in New Zealand. Following is an illustrative example. Case Study – Fletcher Building The company that is under discussion in the paper is the Fletching Building. The company is reported to be New Zealand’s largest listed company. The company in the first six months of 2009 had sales that equalled approximately $3,757 million. Also, the net earnings were around $ 172 million. This means that the company is a very large one and is one of the most dominant ones in New Zealand in terms of the net earnings. However despite the success of the company, it has suffered from the recession especially in the last six months of 2009. (Fletcher Building reports a profit drop of 10%). In the last six months of 2009, according to a report by the New Zealand Herald (2010) the Fletcher Building lost around 10 % of its profits. The total sales fell to $3,393 million while the capital expenditure was decreased by approximately 53 percent. Earlier the earnings per share had been 34.1 percent. However in the last six months the earnings per share fell to 25.5 after a fall by 25%. The net earnings also fell by a great percentage to $154 million with operating earnings also falling to $271 million. There could be numerous reasons that are accountable for this. It has already been discussed that the global economy is going through a credit crisis. There is a reduction of the flow of cash since approximately two years and the remedy undertaken by certain companies includes the generation of the cash from operating activities. From the statistics that have been mentioned above it can be seen that the Fletcher Building has been successful in the generation of the cash flow in the company. This is because the cash flow from operations rose by around 52% in the last six months to $317 million. The government of New Zealand may also be given credit for this because recently it has tried to curb the credit crisis by the expansion monetary policies. The increases in the money supply by the means of the reduction of the discount rates of the banks (or the open market dealings) affect the cash flow in a positive way. The same trend is observed for the Fletcher Building where the cash flow has risen considerably. The rise of the cash flow obviously has had a positive impact on the circular flow of income. Apart from the rise in the cash flows, the Fletcher Building has generally suffered at the hands of the recessions, at least in the last six months of 2009. The decrease in the net earnings may be attributed to the tough economic conditions in which the company operates, as CEO Jonathan Ling relates. Because of the current situation of the economy the investment for the company has fallen over the previous years. The decrease in the net earnings may also be attributed to the reduction of the investment. Investment, since it is an injection to the circular flow of income, does affect the earnings in this case. The decrease in the earnings means that the profits of the company are reduced. From the statistics it is evident that the company has tried its best to cut down on the expenses. The capital expenditure has been reduced by 53 percent which means that the company is eager to reduce its average costs so as to survive the tough economic conditions. The company has suffered indeed. However it has not yet headed for the worst effects of the recession. The reason that is given by the CEO of the company is the fact that the government has tried its best to push up the sales of insulation by 39% by concentrating on the increase of the demand by the adopting of certain policies. The government does not want the GDP to fall and since the Fletcher Building contributes a lot to the Gross Domestic Product, it is strongly backed by the government; yet, the government go beyond this for solving this issue. Recommendations Throughout the world countries, like China, are coming out of the recession. The consequence of this is that the economic growth is likely to occur. OECD also reports that the trade flow of New Zealand are also likely to improve. However if the trade flows for New Zealand increase in the favour, a betterment would be observed in the balance of payments. Normally that would be a good advancement of the economy but in the case of the recession the country needs to be very cautious. A betterment of the BOP means that the exports are increased and the imports decreased. This may ensure that the inflation in an economy rises as a result of increased aggregate demand. The government in such a case needs to check on the inflation rate. Already the rate is predicted to rise from 2.2 to 2.5 the next year. At this stage of the economy, an increase in the inflation rate may have direct implications on the exchange rate and the unemployment level of the country. The GDP of the country is also predicted to be rising in 2011 by 3.9%. That is a huge increase but the government should also consider other adverse effects that the GDP increase can have on the markets in New Zealand that are already suffering. Conclusion To conclude, the recent global recession has had grave effects on the economy of New Zealand. The Fletcher Building is an example of how much the companies in the country have suffered. In order to help such companies the government needs to be more active. However when it comes to certain policy decisions it should be very cautious too because any wrong policy could ruin the economy that is already suffering. References Alley, R. (2001). Financial Crises and Recession in the Global Economy. UK. Edward Elgar Publishing. King, S. and Cushman D. (1997). Lessons from the Recession: A Management and Communication Perspective (Suny Series in International Management). US. State University of New York Press. LaBonte, M. and Purcell, P. (2009). Recession, Depression, Insolvency, Bankruptcy, and Federal Bailouts. US. TheCapitol.Net, Inc New Zealand Herald. (2010).Bounceback may be weaker, says OECD [Internet] Available from < http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=10647921> [Accessed 5 June 2010] New Zealand Herald. (2010). FletcherS Building reports 10 per cent profit drop [Internet] Available from < http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10626707 > [Accessed 5 June 2010] Shankar, A. (2008). The Subprime Crisis-Implications for India. India. Madras School of Economics. Walden, R.(2008).The Subprime Crisis: Cause, Effect and Consequences. US. Networks Financial Institute Read More