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Monthly Economic Indicators

Special Topic: Treasury's business talks and other surveys of business intentions

Surveys of business opinion are valuable for helping to forecast developments in the economy.  To help interpret recent survey findings, and improve our understanding of the economic environment more generally, analysts from the Treasury met with a small number of businesses to discuss their recent experiences and expectations. In early August the Treasury visited 32 businesses in the three main centres.  Large firms we visit personally.  Smaller firms, including farms, are covered in our discussions with accountants and business advisors. 

This Special Topic reviews the key features of the business environment to emerge from our meetings, and relates these features to other surveys of business opinion.  These features form the economic backdrop for the Treasury’s forthcoming Pre-Election Economic and Fiscal Update.    

Firms expect the economy to remain weak

The overall picture of the economy to emerge from our business talks is one of weak activity in the June quarter, particularly in the retail sectors and those servicing the residential property market.  Over the remainder of the year and into next year the outlook is for stable to improving conditions. 

Agriculture is the primary exception

The dairy sector has enjoyed a good year, despite the drought that affected some producers.  For those not affected by drought, one firm described the year to May as “the best ever” for dairy farmers.  In the short-term, volumes were expected to return quickly to their pre-drought levels; however, rising input costs (including fertiliser, grazing, feed and power), coupled with an expectation of a lower milkfat payout, would reduce profitability. 

International prices have been rising for both lamb and beef and the weakening currency has also been helping restore margins.  The drought earlier this year has led to a large drop in sheep numbers, which is expected to result in a fall of 23% or more in lamb production over the coming year.  Lamb volumes are unlikely to recover, particularly as the demand for land from the dairy sector remains strong.  The outlook for beef volumes is steady. 

Prospects for the seafood industry also appear to be improving with higher world prices for some species; however, high fuel prices limit the scope for large increases in volumes.  Crop farmers had also enjoyed a good year, but were expecting profits to be down in the current year as rising input costs compressed margins.    

Manufacturers were more cautious

Manufacturers reported mixed experiences over the last six months, with some increasing profits and others seeing the bottom line deteriorate.  However, they tended to share the view that production volumes were likely to slow over the next six months, largely reflecting the slowdown in activity evident around the world.  The fall in the exchange rate was welcomed by those we spoke to and would help restore margins and competitiveness. 

The August release of the National Bank Business Outlook (NBBO) provides some support for this story with a positive outlook for agriculture over the next 12 months and, while still negative, manufacturing has improved from its low earlier this year (Figure 9).  

Figure 9 - Activity Outlook Index
Figure 9 - Activity Outlook Index.
Source:  ANZ National Bank

Tough times ahead for retail, tourism, property and construction  

Small retailers and whiteware retailers appear to be bearing the brunt of recent declines in retail sales, but there was no clear sales trend among the big retailers we visited. Some firms considered that customers had been “trading down” or purchasing less expensive items than otherwise, others characterised their experience as reduced sales of non-essential items.  June’s retail trade figures support this view.  We also received mixed views on retail pricing and employment intentions.  Some retailers reported an increasing ease of passing through cost pressures, while others felt this had become more difficult and their margins were being squeezed as a consequence.  Few retail firms reported an intention to increase employment but some said they were looking to reduce staff or hours worked.    

Firms operating in the tourism sector reported a downturn in the numbers of tourists or a fall in spending by tourists (reflecting a shift in the mix of visitors), over the last six months.  Although they had seen some pick-up in July, firms generally considered that activity and employment in this sector would decline over the next 6-12 months. 

Firms operating in the development segment of the property market, including mortgage lenders, confirmed that activity in this area was “dead” i.e. no growth, and thought it would stay that way for a while.  The difficulty in attracting finance for these projects was a key driver.  However, there did appear to be some regional variation, with Auckland being hit harder than either Wellington or Christchurch. 

Other parts of the construction sector, such as infrastructure and non-residential construction, were in a better condition.  Infrastructure spending, including roads, sports facilities and IT, was generally seen as being on an upward trend. 

Labour market expected to continue to ease

Overall, few firms expected to continue to increase staff numbers over the next six months, while a small number expected to reduce staff.  We received anecdotes of a notable easing in the difficulty in finding unskilled labour in the Auckland region, and of a more subdued easing in other centres.  The market for skilled labour seemed as tight as ever, as did the supply of labour outside the main urban areas. 

The June Quarterly Survey of Business Opinion (QSBO) found a net 6% of firms reporting that it had become easier to find unskilled labour – a marked improvement from December 2007. The August NBBO shows that economy-wide employment intentions over the next 12 months remained negative (Figure 10).

Figure 10 - Labour market developments
Figure 10 - Labour market developments.
Source:  ANZ National Bank, NZIER

In terms of labour costs, a large proportion of firms reported wage and salary rises for skilled labour of between 5 and 10 percent, significantly higher than wage increases of 3½ to 4½ percent for less skilled labour. The rapid pace of labour income growth evident in Figure 5 looks set to continue.   

Weak outlook for business investment

Firms reported that borrowing costs had increased and some had found their borrowing choices constrained; however, they did not report any particular difficulties in raising the level of funds they required.  This may reflect both the relatively low levels of debt on the firms’ balance sheet and the robustness of their business cases.  Overall, the decline in the demand for loans appears to be offsetting the decline in funds available for lending.  The corollary is a weak outlook for investment growth with firms generally looking to pull back their investment plans.  A number of firms were concerned that the proposed Emissions Trading Scheme would reduce their profitability.

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