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Special Topic 1:  Treasury’s Business Talks, March 2011

Treasury’s forecasting team met with around 30 businesses and business organisations in Auckland and Wellington during March 2011. The talks were conducted after Christchurch’s 22 February earthquake but before Japan’s 11 March earthquake. We had also planned to visit Christchurch but these visits were cancelled.

General business conditions flat

As in the previous round of business visits in September, trading conditions were summarised as being flat. Some businesses had a good start to 2010 but saw sales and profits decline as the year went on. Others started off flat, steadily increased through the year, but saw domestic activity slow markedly after the 4 September earthquake. Some businesses commented that activity had been picking up through the early part of 2011, but the 22 February earthquake had dented confidence to such an extent that business activity had since slowed noticeably.

These opinions are supported by business confidence which generally decreased through 2010, but recovered slightly towards the end of the year and in early 2011. However, business confidence and firms’ own activity outlook plunged after the 22 February earthquake in the National Bank Business Outlook survey.

The retail and tourism sectors were particularly mentioned as being ‘weak’. In contrast, exporters are doing well, particularly commodity exporters, but also some non-commodity and manufacturing exporters. The notable exception to this is the wine industry. The NZD is still seen as frustratingly high and volatile, although the NZD/AUD cross rate being at a 19-year low is a positive.

We received some encouraging reports of some large investment projects about to be undertaken but, apart from those few examples, firms talked only of necessary replacement, with few major investment projects in the pipeline.

Credit availability has improved since the last round of business talks. Banks are more willing to lend than six months ago, albeit with stricter conditions around the lending than was the case prior to the global financial crisis. It is more usual now for lending decisions to be made at head office rather than at the local level.

Labour market conditions static

Employment levels could best be described as static. Earthquake-induced layoffs aside, there were some firms planning to increase the size of their workforce, some looking to downsize a little, but most are planning to maintain headcounts at current levels. In some cases, suitably skilled workers are still hard to find but, in general, firms are getting a good range of suitably-qualified people applying for vacancies. In terms of wage and salary increases, most employers were talking about small increases, typically in the 2-3% range.

Profitability low, but growing

Profits are below expectations, but there has been some small profit growth in the past year. Anecdotes suggest smaller businesses may have enjoyed stronger profit growth than the larger ones. On the other hand, recent Balance of Payments data indicate that foreign-owned businesses recorded strong profit growth in the December 2010 quarter.

Canterbury earthquakes’ impact

Below is a selection of comments from the businesses we visited.

  • Small businesses have suffered more than large ones.
  • There was a small immediate drop in inbound tourists into New Zealand in total. Of more concern, forward bookings have dropped off sharply.
  • There is likely to be an immediate surge in the demand for, and the construction of, temporary housing. This will also boost demand for mobile accommodation.
  • A lack of skilled labour, especially in the Canterbury region, will be a constraint on reconstruction. Nevertheless, the scope of the work is enormous, with residential repair and reconstruction being the immediate priority. Commercial reconstruction will follow later once the bulk of the residential work is completed.


These business talks were clearly less positive than our last talks in September 2010. Earthquake effects had a large influence on the sentiment of the firms that we visited. Reports from other sources had been more positive in early 2011.

Special Topic 2:  Economic impact of Japanese earthquake

A magnitude 9.0 earthquake occurred off the north-east coast of Japan on 11 March 2011 and the subsequent tsunami caused widespread damage to the Tohoku region.  In terms of the cost of the damage (but not in terms of lives lost), it may be the greatest natural disaster ever.  This special topic looks at the economic impacts of the earthquake on Japan and New Zealand.

Earthquake will reduce Japan’s output …

Estimates of the damage resulting from the earthquake and tsunami range as high as JPY25 trillion (USD300 billion), equivalent to 5% of Japan’s annual GDP.  This is more than double the damage caused by the 1995 Kobe earthquake (the previous largest natural disaster) and around 25 times greater than the cumulative damage caused by the 4 September and 22 February Christchurch earthquakes, but their costs amounted to around 8% of New Zealand’s annual output.  The earthquake is estimated to reduce Japan’s GDP growth by half a percent in 2011 (to around 1%), with a similar-sized rebound in 2012 as the reconstruction gets underway.

The relatively fast rebound in growth is based on the recovery from the Kobe earthquake in 1995, but the impact this time may be more long-lasting as around 6% of Japan’s power generation has been destroyed.  Manufacturing output is likely to be curtailed until this capacity is restored, but spare capacity in the Japanese economy as a whole may speed the recovery.  Continuing fears of contamination from the damaged nuclear power plants may slow the clean-up and recovery.

… but only a small impact on global growth

The slowing in Japan’s economy will not have a marked impact on world growth, even though Japan is the third largest economy (recently overtaken by China) and accounts for about 9% of world output.  Growth has averaged only 1% p.a. since the early 1990s and so Japan has not been a major driver of world growth (Figure 6).

The earthquake may, however, bring some disruption to production in other Asian economies which have supply-chain links to Japan for the electronic components produced in the Tohoku region.  Korea and Taiwan are most likely to be affected in the near term, but will recover as supplies are restored.  The recovery phase may bring increased demand for industrial raw materials from ASEAN economies, e.g. timber, oil and gas from Malaysia and Indonesia.

Figure 6 - Japan's economic growth
Figure 6 - Japan's  economic growth   .
Source:  DataStream

Main impact on New Zealand via trade

The main impact of the earthquake on the New Zealand economy is also likely to come through merchandise trade.  Japan is our fourth-largest trading partner, accounting for 8% of exports and 7% of imports in 2010.  Exports are dominated by a small number of commodities: aluminium (19%), forestry (13%), horticultural products (12%), dairy products (11%) and meat (9%).  The main item imported is new and used vehicles.  Japan is also our fifth largest source market for short-term visitors for tourism and international education.

Trade flows are likely to be disrupted in the short term and there may be increased demand for food as fears of nuclear contamination remain high.  As the rebuilding phase gets underway, demand for aluminium and forestry products is likely to increase.  A reduced supply of new vehicles and parts from Japan is expected as carmakers have reduced production and there may be fewer second-hand cars available for export.  Visitor arrivals are also expected to decline, with our own earthquakes contributing to the fall-off as well.

Australia is likely to benefit from the rebuild, despite the risk of short-term disruption to trade.  Japan is Australia’s second largest export market, with a 20% share, nearly 90% of which is commodities.  As the reconstruction gets underway, there is likely to be increased demand for Australian mineral resources.  This will be of indirect benefit to the New Zealand economy, given that Australia is our major export market.

Other economic impacts of the earthquake

Reconstruction will impose a further burden on the Japanese government which already has gross debt of 185% of GDP, possibly increasing the focus on heavily-indebted governments, although most of Japan’s debt is funded domestically.  The Bank of Japan’s policy rate is 0.1% so no further reductions are possible.  The additional demand for capital for the reconstruction may push up long-term government bond rates internationally, especially for countries such as New Zealand which have a significant amount of bonds held by Japanese investors.

The loss of nuclear power generation in Japan and possible reduction in capacity elsewhere (as old plant is retired and new sites are delayed) are likely to increase the demand for fossil fuels.  This comes at a time of already elevated oil prices as a result of rapid demand growth and reduced spare capacity, as well as geopolitical tensions in the Middle East and North Africa.

Higher oil prices would in turn lead to higher food prices as oil and related products (e.g. fertiliser) are inputs to agricultural production; higher oil prices might also lead to increased demand for grains for ethanol production, raising agricultural commodity prices generally.  Depending on the relative price changes, this effect could be positive for New Zealand as the increase in agricultural commodity prices could outweigh the rise in oil prices in our terms of trade, given that agricultural commodities dominate our merchandise exports.


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