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Monthly Economic Indicators

Special Topic: Business Talks

Treasury talks with businesses in September[1] found an economy that had reached the bottom of the business cycle and was now showing signs of an upswing. This was consistent with the GDP result, which reported a 0.1% increase for the June 2009 quarter following five consecutive quarterly decreases.

Mixed reports across the sectors

Meat prices have helped sheep and beef farmers to have a reasonably good year. The same cannot be said for dairy farmers where the level of the milk payout means that the average dairy farm made a loss last year. Debt servicing is a concern for both types of farmers. The outlook for dairy farmers is positive, with the increase in the dairy payout, but the NZD price for sheep-meat and beef exports is declining.

We received a mixture of reports on manufacturing. Generally, those servicing the domestic market are struggling owing to a fall-off in demand. Exporters selling into markets where demand is holding up are faring well. Others are not doing quite so well despite the quality of their goods. All exporters are feeling some downward pressure from their customers on prices and mentioned the level of the NZD relative to other currencies as a concern, but many mentioned that it was the volatility rather than the level that caused them the most problems.

On the construction front, infrastructure, e.g. roads and stadia, seemed to be the main area where there was currently any significant activity. There are few significant commercial projects in the pipeline and residential building is quiet. There has been some rationalisation of firms involved in residential construction, with funding scarce.

Total tourist numbers are down and the mix has shifted away from big-spending European and East Asian visitors to lesser-spending Australians. This has had flow-on effects for retailers. Overall retail is in a significant downturn, but the smaller retailers have been affected more than the big, nation-wide chains. In fact, some of the large chains have reported increased sales and profits. Essential purchases, e.g. appliance replacement, are still happening but more-discretionary consumer spending has been deferred.

Labour market has bottomed

Many firms have reduced staff numbers, but this appears to be coming to an end now. Staff reductions have occurred at all levels, from unskilled workers right through to senior management. Employers have been careful not to trim their workforce too much, particularly retaining skilled workers, so that they are well-placed to take advantage of the impending economic upswing. Some firms expect to resume or increase hiring in 2010.

In an effort to cut costs, but also retain staff, workers’ hours have been reduced. This has been achieved through a mixture of overtime restrictions, job-sharing and reduced working weeks.

Wage rises have been restricted to no more than cost-of-living increases. There were many reports of nil increases, especially for salaried staff, and even salary reductions. Previously-negotiated wage agreements are being honoured. Employers generally expect to resume salary and wage increases over the coming year.

Credit conditions still tight

Although credit conditions have eased a little recently, they are still viewed as being much tighter than in the past. Credit is still seen as expensive, with lenders demanding high premiums for perceived risk, and also reflecting the high cost of funds, both offshore and retail, relative to the Official Cash Rate. Officials received several reports of good-quality, cash-flow positive businesses being declined credit for what appeared to be sound business proposals. This may have had more to do with the supply of funding than the lender's willingness to take on risk.

Investment and profits restricted

Investment plans have been scaled back considerably lately. For most firms, investment has been restricted to essential maintenance. Lack of available, affordable funding is a constraint on investment for some businesses wanting to expand. For most businesses, the current strategy appears to be to generate cash to pay down debt, thereby strengthening balance sheets.

Overall, profits declined in the 2009 tax year but may be turning now, although it is too early to tell with any certainty. There have been many incidences of losses being incurred, some of them quite large, which could have a negative effect on the Crown’s tax take for the next few years.


  • [1]In mid-September, Treasury contacted 45 firms and business organisations in Auckland, Wellington, Dunedin and Christchurch. This report summarises the opinions of those firms and organisations and does not necessarily represent the Treasury’s views.
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