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Monthly Economic Indicators

Special Topic: Business Talks

Treasury talks with businesses in March [1] highlighted weakness in the economy, with falling company profits and a high degree of uncertainty.  In general, firms are responding to the weak conditions by cutting costs, reducing investment and generally being more conservative in their business decisions.  Overall, the talks supported our view that economic growth in the near term will be weaker than the downside scenario in the December Update. It must be noted, however, that the sample included mainly larger firms.

Construction and retailing weak …

Weakness in construction, especially residential, is expected to persist in the near term as lending criteria remain tight and investor confidence remains low. Infrastructure works are providing some offset to the decline and are expected to absorb some of the lay-offs in the sector.  Retailing as a whole is down considerably on last year, although there has been support recently from consumers purchasing discounted goods, taking advantage of lower prices before the impact of the weaker exchange rate is reflected in higher prices for imported goods.

… but primary sector remains resilient

Apart from declining construction in our major markets adversely affecting forestry, the primary sector appears fairly resilient so far to the adverse global economic conditions. Dairy production has increased, reflecting recovery from last summer’s drought and a high rate of farm conversions, while prices for dairy products are showing tentative signs of stabilising. Demand abroad for sheepmeat and beef remains steady as household behaviour changes in response to the global financial crisis. More UK consumers are choosing to eat lamb at home, while more American consumers are switching to the beef supplied by New Zealand farmers.

There were some positives…

While activity is down overall, it is not all “doom and gloom”.  A feature of the talks was the lower exchange rate providing exporters a much needed buffer against falling global demand as currency hedges unwind. Additional positives were some firms reporting steady sales in niche markets and others benefitting from supplying goods and services that have increased in demand, for example New Zealand beef and infrastructure investment both at home and abroad.

... and credit generally not a constraint

On the whole, access to credit has not been restricted. However, tax practitioners’ comments and some small and medium-sized enterprises noted increased difficulty accessing short-term funding for working capital at a reasonable price.  However, borrowing costs have decreased for most as lower benchmark rates have more than offset higher spreads on bank lending and higher facility fees.

The labour market is weaker…

The majority of firms have reduced staff numbers in recent months and expect to make further reductions over the coming year (Figure 11). Expectations of wage and salary rises have been reduced dramatically in recent months, with the majority of pay increases expected to be between zero and the rate of consumer price inflation in the coming year. Inflation expectations have tumbled, confirming wage rises will be minimal in the near term. With a weaker labour market and fewer people departing for overseas, firms noted it is considerably easier to find both skilled and unskilled labour.

Figure 11 - Employment
Figure 11 - Employment.
Source: Statistics NZ, National Bank

… and investment intentions, profits lower

Planned investment has plummeted nearly across the board, with businesses citing declining profits, increased uncertainty and the higher cost of imported capital as limiting factors (Figure 12).  Businesses intend to extend the life of capital stock as long as possible, with investment for some firms barely keeping up with the depreciation of capital. A number of businesses undertook substantial investment over the past two years when the cost of imported capital was lower, allowing them to enjoy productivity gains currently. Tax practitioners pointed to lower profits for their clients in the 2008/09 year and anticipated further weakness in the 2009/10 year.

Figure 12 - Investment
Figure 12 - Investment.
Source: Statistics NZ, National Bank

The business talks supported our view that the economy is weaker in the near term than in our downside scenario in the December Update. Economic growth in the December quarter 2008 was softer than estimated in the downside scenario and looks likely to remain softer in the near term, despite the downside scenario incorporating no quarterly growth in the March 2010 year.

The information gained from business talks forms an important input to our economic and fiscal forecasts for the upcoming Budget, to be released on 28 May.


  • [1] Over the first half of March, Treasury contacted thirty-three firms and eight tax practitioners in Auckland, Wellington and Christchurch.
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