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Monthly Economic Indicators

Special Topic 1: March 2013 Business Talks

Over the course of a week in March, Treasury officials met with around 40 businesses, accounting firms and trading bank economists in Auckland, Wellington and Christchurch to discuss the outlook for the economy. The information gathered will be used to inform the Treasury’s Budget Economic and Fiscal Update. The views expressed are those of the businesses we met.  

Sentiment remains positive…

Since the Treasury’s last round of business talks in September 2012, sentiment remains positive on the whole but “patchy” with some firms adjusting to the lower growth in business activity, regarding it as the “new normal.”  Activity continues to differ amongst regions where Auckland is humming along, largely thanks to the strength in the housing market, while there has been a noticeable pick-up in Canterbury as the earthquake rebuilding continues to gather momentum. Wellington is relatively subdued, primarily attributed to a constrained public sector.

The residential housing market is still perceived to be strong with increasing sales and profitability for firms allied to this sector. This has been aided by lower borrowing rates which have seen the demand for property finance pick up in conjunction with higher loan-to-value ratios being approved. The stronger presence of foreign buyers from emerging Asia and Europe is also adding to demand. Strength in the housing market is being led by the Auckland region where strong overseas and internal net migration is placing added pressure on the existing stock. There are still concerns over the lagged supply response in Auckland, while in Wellington an overhang of properties is holding back the market

In response, residential construction work is improving in Auckland and Canterbury but is fairly flat elsewhere. The recent collapse of Mainzeal caused some concern about the state of the industry but most of the work will be quickly picked up by other firms. Progress in Canterbury had undoubtedly picked up recently, although a real surge is yet to be seen. Nonetheless, firms believe the groundwork has been laid for the rebuild to really ramp up as demolition work winds down and insurance settlements proceed. There has also been a noticeable improvement in confidence for the CBD commercial rebuild, which is yet to begin, given greater certainty around government anchor projects.

The retail sector has picked up since the last round of business talks with stronger underlying sales growth and some expansion in store premises evident. The strength was consistent across the country, while growth in Auckland and Christchurch was particularly strong. Discounting is still considered to be widespread across the industry as a whole. This high volume-low margin model will continue to be a drag on profitability.

The manufacturing sector is still under pressure from the elevated New Zealand dollar (NZD), although this was a weaker theme relative to the previous business talks. Alongside this, several firms pointed to the weak demand from Australia. Strong competition from foreign producers posed a further challenge, with a few firms moving production offshore to keep costs under control. Concerns in the farming sector around the impact of the current drought centre on next season's production and the duration of the dry weather. If the dry weather persists over autumn/winter then it would significantly increase the impact on the economy. Some upside is expected from stronger meat volumes in the near term owing to early slaughter. Outside of the meat and dairy industries, the sector is holding up reasonably well.

… as firms mitigate rising costs…

Firms remain focused on managing costs they can control to maintain margins as other costs continue to rise.  In particular, rising costs relating to insurance, transport (driven by higher fuel prices), and energy were mentioned frequently. The increase in the minimum wage will also contribute to higher labour costs.
The high NZD is helping to provide an offset by reducing imported input costs. Firms exporting to countries with a high NZD cross-rate have generally adapted to exchange rate movements, primarily through hedging. Other ways in which firms were managing their costs were by generating scale and improving productivity, thereby allowing some firms to reduce their total staff numbers.

Recent wage increases have generally been similar to last year and around the rate of CPI inflation. Looking ahead, planned wage increases are slightly ahead of CPI inflation, around 3% with some willing to pay more for good performance. Wage pressure is strongest amongst trades and IT workers. Wage pressure in Canterbury has generally been confined to certain occupations thus far such as finishing trades and digger operators.

Overall, the majority of businesses said that they were maintaining employment at current levels. There were reports of new hiring going forward in service and transport firms, and reports of lay-offs in manufacturing. Skilled labour is difficult to find with several firms pointing out the skills mismatch that currently exists. This has translated to more strength in the high-income end of the labour force as firms are motivated to retain valued and older workers. This provides some backing for the compositional factors behind the current strength in PAYE tax revenue.1 Employers are waiting for a sustained pick-up in activity before they recommence recruitment.

… leading to increased profits

Most businesses reported increased profits largely as a result of managing their costs, although a few firms attributed it to improved activity and better margins. Only a few said that profits were being squeezed and/or would be down in the coming year. In general, tax accountants expect 5% to 10% growth in profits this year based on the tax firms are currently paying. Increased profitability was also reflected in greater merger and acquisition (M&A) activity and reports of investment at levels above depreciation.

What does this mean for the outlook?

Overall, the tenor of these talks was consistent with recent business surveys which suggest that sentiment remains positive for the most part going into 2013. However, the uncertain impacts of the drought provide a touch of caution. Overall, the talks show a continuation of momentum in the economy from a strong December quarter as tax revenue for the current year to date remains above HYEFU 2012 forecasts. This is despite some difficult trading conditions in the form of an elevated NZD, tight margins and a subdued labour market.

http://www.treasury.govt.nz/government/financialstate
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