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Monthly Economic Indicators

Special Topic: Business Talks

In preparation for the Budget economic forecasts Treasury staff met with around 35 organisations in Auckland, Wellington and Christchurch, and corresponded with a number of smaller businesses, during March. The Treasury greatly appreciates the commitment of time and effort made by the organisations that participated.

Businesses generally reported weak trading conditions over the last three months but were optimistic that conditions would improve. Exporters were the main exception, with demand from Australia and China supporting sales growth. Credit conditions remain tight and costs are increasing. Overall, the weakness evident in business investment looks set to continue. The labour market had stabilised and employment growth was likely from around the middle of the year, in line with a strengthening economy. Wages and prices remained subdued.

Business activity

Goods retailers continued to experience tough trading conditions, with sales in December and January generally down compared to the same time a year ago. Smaller retailers who relied on the Christmas period for a large proportion of their sales were reported to be particularly hard hit. In addition, small retailers faced intense competition from the larger chains across the retail goods industry. Consistent with our September round of talks, spending on discretionary items, including restaurants, furniture and consumer electronics, were most adversely affected. Sales were expected to remain flat in the short-term but firms were optimistic that growth would pick-up in the second half of the year.

The construction sector continued to receive strong support from government spending on roads, and residential construction had begun to expand again. Other construction activity was weak with a number of contacts reporting disruptions to the supply of projects in the Auckland region due to the reorganisation of local councils, and spending by local councils across the country was also down. Long lead times for public infrastructure projects and a dearth of private projects were increasing spare capacity within the sector. A lack of finance, low rents and rising vacancy rates were reflected in falling levels of new commercial and retail developments. Vacancy rates were yet to peak.
Exporting manufacturers were experiencing a lift in output from both stronger demand and stock rebuilding. Demand from Australia remained firm and sales were supported by the exchange rate to Australia, but exports to US and UK markets remained under pressure from both the currency’s strength and from excess capacity within many industries. Domestic food and beverage manufacturing remained firm, with the exception of the luxury end of the market. Other domestic manufacturers had seen some recent pick-up in demand, but prices remained low and margins would take some time to rebuild.

Exporters of primary products were generally receiving higher prices for their products compared to a year ago, with demand from China and other Asian economies significant drivers, particularly in forestry and dairy. Higher beef and lamb prices were being offset by the currency and, for processed timber exporters, the strength of log prices was eroding their margins.

Transport sector contacts also saw signs of an emerging recovery with increased domestic and international travel and a rise in container volumes. However, there were questions around the sustainability of the rise in inbound tourism, which had been led by an increase in Australian visitors and container volumes had stabilised in the last month or so. There was some excess capacity in the freight and cartage segment of the industry, which was resulting in fierce competition. Some of this excess capacity was related to the expectation that legislation allowing for larger trucks on the road was imminent. Firms servicing the tourist market were not planning on increasing capacity for the 2011 rugby world cup, but would better utilise existing capacity.

Business credit and investment

The cost and conditions attached to bank credit were again raised as a concern, although outside of property development and entrepreneurial/new entrant finance (including dairy conversion), there were few indications of credit supply being constrained for the larger companies. However, a number of the smaller companies did report reductions in credit facilities and other obstacles to obtaining finance. Banks were reported to be closely managing a number of smaller companies and the number of bankruptcies was likely to grow.

Higher costs of credit and more restrictive lending conditions had led some contacts to make greater use of equity finance and other non-bank funding sources. However, the demand for finance had also fallen and balance sheets had strengthened as firms repaid debt and deferred expenditure until economic and financial conditions became more favourable.

A number of firms were deferring investment projects but some of those in retail, services and exporting industries reported that planned expansions remained on track. Several contacts reported recent investment in either labour saving or inventory management technology and processes over the past 12 months. Overall, private investment intentions remained subdued and weakness in capital expenditures was expected to persist over the next 12 to 18 months.

Employment, wages and prices

Employment had stabilised over the past six months, with some reports of a recent rise in hiring to fill gaps that had opened and some firms had been able to offer additional work hours. Skilled staff remained hard to get and some employers were finding it more difficult to find good quality unskilled staff, although that segment of the market remained relatively loose. There were reports by contacts of a rise in employees departing offshore, a trend which was expected to continue as the global economic recovery matured. Hiring activity was expected to lift in the second half of the year, in line with the overall rise in economic activity.

Many firms had frozen wages and salaries over the past year but reported growing expectations of movement this year in line with inflation. Firms were also looking for opportunities to raise prices and restore margins, but this was difficult given the weak outlook for sales.

Profits and taxes

Profits generally remained weak on the back of falling sales and depressed margins. This was likely to be reflected in lower terminal taxes for the current tax year than in the preceding year. With profitability expected to improve only gradually over 2010 accumulated tax losses could take some years to clear. Some firms had made better estimates of provisional taxes as part of more general improvements in their management of working capital. This was assisted by changes to the provisional tax payment dates, which enabled them to more accurately forecast their terminal tax obligations.

Government policy

In this round of business talks we invited firms to comment on what policy changes would best enable their firms to boost productivity and help New Zealand close the income gap with Australia. Firms with experience in the Australian market commented that Australian operations were not more efficient. Within New Zealand, the cost and time of clearing investment proposals through the Resource Management Act continued to be a concern for many companies. Extending to all firms the 90-day probation period for new employees and greater flexibility in the Holidays Act were suggested as ways to enhance the labour market. A number of contacts pointed to the exploitation of mineral wealth as a means to boost income, while improved broadband access and reduced uncertainty around the Emissions Trading Scheme were also seen as important contributors to higher income growth.

Changes to the tax mix were supported by most contacts, but there was some concern about the possibility of removing the tax allowance for depreciation on commercial buildings, which they considered did depreciate. There could be some volatility in prices if GST was increased, and some prices could increase by more than GST, as new price points were established.

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