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Monthly Economic Indicators

Special Topic: March 2015 Business Talks

In the second week of March, Treasury officials met with around 30 businesses 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 summarised below are those of the businesses. 

Overall, most businesses were experiencing strong levels of activity, especially those with exposure to tourism, and although pricing intentions remain subdued, margins and profitability remain healthy thanks to internal investment in productivity improvements.

Activity remains positive…

Trading activity has remained solid across the country.  Most businesses had experienced high levels of sales recently and were expecting this to continue or strengthen going forwards.  Retailers in particular have seen strong sales since the start of the year, partly attributable to lower fuel prices boosting household disposable incomes as well as warmer weather encouraging consumers to make more short trips and holidays.  This fits with the trend seen in electronic card transactions data, which showed a 1.0-1.2% month-on-month increase in seasonally adjusted core retail sales for both January and February.

Figure 9 - New building consents (12 mma)
Figure 9 – New building consents (12 mma).
Source: Statistics New Zealand

Activity within the Auckland property sector remains buoyant.  Commercial property sales are relatively low at present largely because vacancy rates are at low levels.  Meanwhile residential property values have moved to the point where apartment developments are economically feasible, which should stimulate further activity. This shift is evident in the acceleration of the upwards trend in the number of apartment building consents being issued (Figure 9).

Construction activity in the Canterbury region has remained steady but growth is expected to slow.  Construction of horizontal infrastructure has been proceeding well but there was a concern that building construction is lagging behind, which could lead to a potential gap when the horizontal projects draw to an end. 

Commodity exporters were in general seeing softer demand for their products.  A large element of this was slower growth in China which was leading to weaker demand either directly or via China’s wider influence in global markets.  This is visible in the merchandise trade data where dairy and meat export volumes have fallen in January and February, while forestry export volumes fell through December and January.  Although price outlooks were mixed, it was noted that falling freight prices (as a result of lower fuel costs and surplus shipping availability) and depreciation of the dollar have helped improve returns for New Zealand producers.

...with tourism doing particularly well

The hospitality sector in general and tourism in particular were seeing high levels of activity.  Elevated visitor arrivals, particularly of Chinese tourists although traditional markets are also increasing, have led to high levels of activity over the summer.  The Chinese government’s move to allow more “free and independent travellers”, who tend to spend more per visit, has been a positive development.  The successful tourist season is evident in the official statistics (Table 1), and visitor arrivals have increased further in January and February to new record levels.

Table 1 - Short term visitor arrivals and median spend

  Visitor Arrivals Median Spend per Visit ($)
  2013 2014 % Change 2013 2014 % Change
Australia 1,218,016 1,247,760 2.4% 1500 1200 -20.0%
China 228,928 264,864 15.7% 2200 2900 31.8%
United Kingdom 191,632 194,416 1.5% 2500 2900 16.0%
United States 201,424 220,512 9.5% 2300 2600 13.0%
All Others 877,695 929,848 5.9% n/a n/a n/a
Total 2,717,695 2,857,400 5.1% 1880 1860 -1.1%

Source: Statistics New Zealand, MBIE

Queenstown has been a major beneficiary of the increase in visitor arrivals, with tourist operators reporting double digit sales growth in the region; this has spilled over into retail operations too.  Tourist destinations in the central and upper North Island have also seen higher visitor numbers, partly attributed to the “Hobbit Effect” as well as cruise ship arrivals and a number of events in Auckland.  Although some tourist destinations had benefitted from the Cricket World Cup, the general perception was that it has had limited impact on tourist numbers and spending overall.  This appears consistent with the February visitor arrivals, which do not show a material increase from cricket-playing nations.  The outlook for tourism is positive, with a high level of bookings for next summer and some businesses already looking forward to the 2017 Lions Tour.

Pricing intentions remain subdued...

Most businesses were expecting their sales prices to remain relatively unchanged, with only modest increases at best.  A handful of businesses, mostly in the retail sector, were even anticipating lowering prices in coming months.  Robust domestic and international competition within industries, coupled with the impact of the exchange rate on imported goods prices were commonly cited drivers behind soft prices.  Subdued price inflation is consistent with the latest CPI data, where inflation stood at 0.8% in the year to December 2014, as well as more recent surveys of inflation expectations (Figure 10).  The small numbers of businesses that are contemplating more substantive price increases are concentrated in areas facing structural change or capacity issues, such as the health care and retirement services sectors.

Figure 10 - CPI inflation and inflation expectations
Figure 10 – CPI inflation and inflation expectations.
Sources:  Statistics New Zealand, RBNZ

...with rising costs putting margins under pressure

While selling prices were expected to remain fairly steady at current levels, costs appear to be creeping higher, resulting in margin compression for most businesses.  One of the larger cost drivers was labour, with most companies expecting labour costs to increase 2-3% this year, partly as a result of the recent increase in the minimum wage.  This appears consistent with the latest QES survey, which showed growth in average hourly earnings of 2.6% in the year to December.  The depreciation of the NZD was a concern for those with high exposure to imported goods as inputs in their businesses.  Costs related to property, including leases and construction costs, have also risen.

Businesses were protecting margins in a number of ways.  A significant proportion of businesses were focussing investment on improving internal supply chains and productivity, often through the innovative application of technology.  Other more labour-intensive businesses were focussing on maximising the productivity of their employees through increasing the flexibility of the labour pool.  Finally, some businesses, particularly in the retail space, were trying to shift their product mix towards more premium products that offer better margins.  All of these approaches have positive implications for total productivity growth in New Zealand in the near term.  Furthermore, firms’ ability to protect their margins may be part of the reason that corporate tax outturns are tracking ahead of expectations despite relatively muted nominal GDP growth.

The labour market continues to tighten

All businesses were expecting to maintain or expand their labour forces.  It is getting harder to find labour at all levels, although the availability of migrant labour has alleviated some of the pressures at the less skilled end of the market.  Employment agencies reported that the pool of available workers to place into jobs is getting smaller as unemployment continues to fall.  Attracting and, to a certain extent, retaining skilled labour continues to remain an issue for most of the organisations.  Taken together these factors point to further tightening of the labour market.

What does this mean for the outlook?

Overall, the feedback from businesses is consistent with recent business surveys and data outturns as well as the 2014 Half Year Economic and Fiscal Update (HYEFU), which forecast solid levels of activity but weak pricing over the coming year.  While the Canterbury rebuild remains a major driver of activity, increasingly other regions, especially Auckland, and sectors are taking up the slack.  Solid employment intentions and expectations of wage growth in excess of inflation should support private consumption, with an expanding tourist sector providing further support.

Notes

  • [1]This special topic focuses on non-New Zealand/Australian citizen arrivals given their large influence on net migration cycles and response to policy changes. They are referred to as ‘other citizens’ in this special topic.
  • [2]McDonald, Chris., (2013), ‘Migration and the housing market,’ Reserve Bank of New Zealand Analytical Notes Series AN2013/10, Wellington.
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