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Special Topic: March 2016 Business Talks

In the second week of March, Treasury officials met with 25 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 expressed by the people we met are summarised below.

Outlook for business activity remains positive

In general, the people we talked to were positive regarding recent activity and prospects for the immediate future. There did not appear to be much negative sentiment outside of the dairy industry.

The tourism sector is doing particularly well. Demand has increased greatly over the last 12 months, with strong growth expected to continue. Visitor numbers out of Asia were reported as being up by more than 40% over the past few months, although the length of stay has not increased to levels of traditional western markets and Asian tourist spending in total has not yet returned to pre-Global Financial Crisis (GFC) levels. Similarly, UK visitor numbers, while growing, are still below pre-GFC levels, but are expected to continue to grow, boosted by next year’s British and Irish Lions rugby tour (Figure 1).

Figure 1 - Visitor arrivals by geographic region
Figure 1 - Visitor arrivals by geographic region
Source: Statistics New Zealand

There is little spare capacity in the tourism sector at peak times, leading to higher prices and higher profits, which has also been helped by deflation in input costs. Accommodation is stretched in peak tourist areas, which will hopefully be alleviated by current construction projects. Overall, tourism is in a very good position and has a very positive outlook, particularly with proposed increases in flight capacity into New Zealand.

The increase in tourist numbers appears to be having a spin-off effect on the retail sector, with some reports of retail spending up by as much as 5% year-on-year. This is expected to flatten over the next six months or so, but is not expected to decline. Competition, particularly from online stores, is squeezing margins.

Construction is also very busy and could remain so for the next five to ten years. Construction activity in Canterbury has slowed as the residential and horizontal infrastructure rebuilding efforts are almost complete. However, the vertical rebuild is starting to slowly get underway as commercial investors come back to Canterbury. Furthermore, projects elsewhere are ramping up and taking up the slack, e.g. roading projects around the North Island and residential construction in the Auckland area, the latter of which is constrained only by a lack of available land.

Following a dip in late 2015 caused by tighter loan-to-valuation ratio (LVR) restrictions and tighter tax rules, housing demand picked up in Auckland in early 2016, supporting prices at their current high levels. Land availability is low, but greater density will allow dwelling construction to pick-up. Foreign buyers may now be returning to Auckland and may look to other regions, particularly Waikato and Bay of Plenty.

There seems to be no doubt that the dairy industry is struggling; the fall in dairy prices has negatively affected profitability and dairy investment. However, other agricultural and horticultural sectors appear to be doing well, as prices have largely held up for wine and meat, for example, despite some falls. There is some optimism that dairy prices have reached the bottom and dairy imports into China are increasing on a month-on-month basis. What happens in China over the next few years will be the key influence on the global dairy market.

Pricing intentions are subdued

Businesses noted that most of their input costs are down (Figure 2). The lower oil price, and hence transportation costs, has provided a buffer against the lower NZD for importers. Output prices are flat or falling, mainly owing to low inflation and inflation expectations, and competition, particularly in retail and construction. The net effect of these two factors is that margins have been squeezed and profits have been static.

Figure 2 - Producers’ input and output prices
Figure 2 - Producers' input and output prices
Source: Statistics New Zealand

However, some people reported that they were aware of large profit gains in some sectors, particularly construction and tourism, as mentioned above.

Labour market buoyant

Overall, there is a moderate bias towards hiring. There is strong demand for blue-collar workers in Canterbury, Wellington and Auckland, although it is difficult to attract them into Auckland owing to the perceived high cost of living there. Particular sectors mentioned as having skill shortages included finance, IT, telecommunications, energy and specialized construction roles. In some cases, skills shortages are having to be filled from overseas. There has been a notable expansion in the workforce in the tourism sector, although this is mostly seasonal work; demand is being met in this area, to some extent, by visitors on working holidays.
Wage growth was generally described as ‘slow’, although this appeared to mean somewhere in the range of 2 to 3%. In some cases, this included an element of ‘catch-up’ after a few years of low or nil wage increases. Wage pressures are evident in specialist areas such as IT and engineering. Elevated net migration is adding to the supply of labour, which is constraining wage growth across non-specialist jobs (Figure 3).

Figure 3 - Net migration, arrivals and departures
Figure 3 - Net migration, arrivals and  departures
Source: Statistics New Zealand

What does this mean for the outlook?

Overall, these business talks indicated that recent and current growth in the New Zealand economy is solid, perhaps a little stronger than was forecast in the 2015 Half Year Economic and Fiscal Update. This had been suggested by previous economic data releases, e.g. the rise in employment and drop in unemployment reported in early February, and was confirmed by the December GDP quarterly growth figure of +0.9%, which was reported after these talks were undertaken. All of these things will be taken into consideration as we prepare revised economic forecasts for the forthcoming Budget.

Figure 4 - Growth in real Gross Domestic Product
Figure 4 - Growth in real Gross Domestic Product
Source: Statistics New Zealand
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