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Monthly Economic Indicators

Special Topic: Business talks

Treasury’s talks with businesses in September[1] revealed an economy that had come off last year’s low point but with growth remaining weak.

Trading activity

Business activity was generally described as ‘flat’. Whilst sales and profits had picked up from last year’s low levels, the increase was not large and businesses had been hoping for a stronger recovery out of the recession. An anticipated upswing through the second half of 2010 is yet to eventuate.

There were mixed reports from exporters. Those firms exporting to Australia and/or exporting commodities are doing well, whereas firms exporting to the USA and/or Europe are not. Export receipts from meat are expected to dip in the 2010/11 season as a drought-induced fall in volumes more than offsets a rise in prices. Long-term prospects for the meat and dairy industries are positive as the international demand for protein continues to increase.

House construction has not picked up and there are few commercial construction projects in the pipeline. There has been plenty of infrastructure construction taking place recently, e.g. roads and stadia, but this work is also tapering off now.<\p>

In general, retailers are struggling, with a noticeable slowdown in the past couple of months. There is no evidence of a pre-GST increase spending spree. Tourist numbers are still holding up, especially in the South Island. However, the number of big-spending American, European and Japanese tourists are down, replaced by lesser-spending Australians and Chinese, so overall spending by tourists is down.

Employment, wages and prices

After an initial flurry of lay-offs through the early part of the recession, employment has subsequently remained fairly stable. Most employers retained staff through the recession so that they would be prepared for the upturn when it started. There are still skill shortages in some professions and some firms reported difficulties recruiting high-performing staff.
Nil-to-low pay increases were the norm through the recession. By and large, increases in wage rates and salaries have now resumed, but these are, on average, limited to current increases in the cost of living (excluding any anticipated GST increase).

Some firms have been able to push through price increases, but in the main, businesses have come up against consumer/customer resistance when trying to increase prices, so prices have remained quite static. This is likely to remain the case when the GST rate increases on 1 October. Many firms are planning to initially partially absorb the GST increase, particularly those firms with products priced around sticky price points.

Business investment, credit and profits

Business investment has largely stalled. Any investment that is taking place is mainly restricted to repairs and maintenance. There were reports of firms catching up on previously-deferred maintenance and some significant investment, but these were the exception rather than the rule.

The three main reasons cited for the muted level of investment were:

  • a lack of business opportunities to invest in;
  • caution on the part of businesses, i.e. unwilling to take the risk of additional investment in what are perceived as uncertain times; and
  • lack of cash or credit.

The cost of credit is cheaper now than it was before the recession. However, there is a pervading perception that it is not as cheap as it could be because lenders have increased their lending margins over the last couple of years. This has occurred because the lenders are now more-accurately pricing risk and the cost of funding has increased.

The level of profits declined through the recession, reaching a nadir in 2009. Previously, firms had been looking forward to an increase in profits in 2010. This turned out to be the case but,
with the exception of a few stellar examples, the increase in profit was not as great as was hoped for. Expectations for 2011 are that profits will be at a similar level to that of 2010.

Canterbury earthquake

Most firms that were interviewed reported a short period of disruption to their business before they were up and running again. Retailers estimated that they lost up to a week’s worth of sales, which will never be recovered. Some manufacturers also lost up to a week’s production, but will be able to make this up over the coming weeks and months. There were reports that residential real estate activity and car sales have dropped owing to difficulty in obtaining insurance. The focus so far has been on cleaning up and temporary labour has poured into the Canterbury region to help with this. Additional labour will also be required for the repairing and rebuilding effort. Construction firms will be allocating extra resources to the Canterbury region, resources that would otherwise have been sitting idle or lost overseas, owing to the further deterioration that was imminent for this sector. Local businesses are resisting the temptation to ‘price-gouge’, as they do not wish to tarnish their reputations, and there was at least one report of a business being lenient on customers who are late paying bills because of the earthquake.

Notes

  • [1]In mid-September, Treasury contacted 35 firms and business organisations in Auckland, Wellington and Christchurch. This report summarises the opinions of those firms and organisations. Talks in Christchurch were conducted over two days in the middle of September. The situation in Canterbury is changing daily, so comments related to the impact of the earthquake may already be out of date.
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