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Monthly Economic Indicators

Special Topic: March 2012 Business Talks

In preparation for the Budget economic and fiscal forecasts, Treasury staff conducted around 40 interviews with businesses and business organisations in Auckland, Wellington and Christchurch in mid March to gain an insight into current and prospective economic conditions. The following is a summary of the opinions of the people whom Treasury officials visited.

General business conditions "flat"

Activity was most commonly described as being "flat". Sometimes, this term was used to indicate that that there was little or no growth in business activity, which was bumbling along at a relatively low level. At other times, it was used to mean that business was growing but the rate of growth was low and/or the same as last year.

Variable sector performance

There was a great deal of variability across different sectors of the economy and even across different firms operating within the same sector. Retail is a good example of the latter phenomenon. Some retailers described business as being slow, with the 2011 Rugby World Cup (RWC) being cited as a negative influence on retail. Other retailers said that business was booming and that the RWC has been good for both sales and profits.

There were also conflicting reports from the travel/tourism sector. Some operators enjoyed a boost to business through the RWC period, which has continued on afterwards. Others have experienced declining sales over the past 9 to 12 months. On balance, the RWC was perhaps not as much of a boon for tourism as had been hoped, despite the higher-than-expected visitor numbers.

Construction is doing it tough. Housing construction was very weak in 2011 and commercial construction is "flat". However, prospects are good for the construction industry with the rebuilding effort in Christchurch starting to gain some momentum.

Residential property is very much a 2-speed market at the moment: Auckland has picked up but the rest of the country is … "flat". Even within Auckland, activity is concentrated more towards the central city rather than more outlying areas.

Firms exposed to the agriculture sector were not well represented in these talks. From the few comments that were received, on-farm production has been good, boosted by favourable weather conditions, and prices are relatively high, even though Fonterra's dairy payout forecast has eased back a little lately. Prospects for the future are still positive.

There were few comments on manufacturing and exporting. Log and dairy exports are continuing apace, but other manufacturers are struggling, with the high NZD causing some concern.

Profits also "flat"

In line with business conditions, profits were also described as being flat. Input costs are up, especially fuel, insurance and, to a lesser extent, wages. Sales prices are static. As a result, margins are under pressure. There were exceptions to this, with some firms reporting record profits recently.

"Flat" employment and investment intentions

While some firms reported that they planned to undertake significant capital projects in the near future, these were the exception rather than the rule. Most were maintaining capital expenditure at depreciation levels or less. Any business investment that has been going on has been concentrated in the IT area. There were many reports of increased M&A activity over the past six to twelve months.

On employment, most firms are looking to maintain staff numbers at current levels. There has been some shuffling around of the workforce, e.g. from head office to more-productive parts of the business. Planned wage increases are in the 0-5% range.

Earthquake impact and recovery

The residential rebuild in Christchurch is expected to begin in earnest in the second half of 2012. This is unchanged from the last round of business talks in September, despite the December aftershocks. While there has been some rebuilding activity in the CBD, the bulk of the commercial rebuild is still at least a year and a half away and will be a 15-20 year job. Availability of labour and the slow pace of insurance claim settlement are both constraining activity to some extent. The impact of the Christchurch earthquakes has been felt across the whole country. Not least of the effects is a fundamental change to the insurance market. The most immediate and obvious effect is the cost increase, with the increased price of reinsurance being passed directly through to customers. Perhaps more significantly, excesses have increased with some customers now having to carry more of the risk themselves.

The views of the businesses were consistent with our view in the forecasts underlying the Budget Policy Statement that growth would be weak in the first half of 2012 following the temporary boost from the RWC and before the Christchurch rebuild gets fully underway in the second half of the year.

However, they were less positive than recent business surveys which have indicated some pick-up in activity. The National Bank Business Outlook survey recorded a lift in firms' activity outlook over the next year from an average of 26.9 in the December quarter to 31.2 in February and 38.8 in March. The largest increase was in the construction industry. The Business NZ-BNZ Performance of Manufacturing and Services Indices also rose in February, indicating stronger growth. The March Quarterly Survey of Business Opinion is due for release in early April.

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