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Special Topic: September 2012 Business Talks

Over the course of a week in the middle of September, Treasury officials met with around 40 businesses, accounting firms and trading bank economists in Auckland, Wellington and Christchurch. We were looking for their summaries of the state of their and/or their clients' businesses and their opinion of the state of the New Zealand economy. The information gathered will be used to inform the Treasury's up-coming Half Year Economic and Fiscal Update.

Sentiment is improving...

Compared to the previous round of talks conducted in March 2012, businesses were slightly more positive. Auckland is buoyant, led by a surge in the housing market and things are starting to pick up in Canterbury as the earthquake rebuilding effort gathers momentum. Wellington was perhaps a little more subdued, possibly owing to a comparatively quiet public sector.

The residential housing market in Auckland is 'booming'. Sales and prices are well up on last year across all price ranges as a result of high demand and little supply. Land for residential development is available on the outskirts of Auckland, but demand so far away from the city centre is negligible. The Auckland market is expected to continue its strength, as there is little potential for a supply response.

Allied to this, the construction sector is quiet. Residential construction in Auckland is weak, with consents around 1960s levels. House building in Christchurch is also weak, with the main focus of the rebuild so far having been on demolition and repair. Firms were optimistic regarding the prospects for construction with housing reconstruction expected to get underway in Christchurch next year and the CBD rebuild shortly thereafter.

Retail was the sector most commonly described as 'struggling'. Year-to-March results were good, helped by the Rugby World Cup and replacement of goods after the Canterbury earthquakes. Since then, business has been softer, with sales flat-to-declining.

There was some discussion of the effect that the high NZD is having on exporters. Some firms commented that a high NZD does not really affect exporters' profits as the exchange rate moves with commodity prices. Some exporters try to mitigate the effects of the high dollar through a mixture of currency hedging and natural hedges, e.g. sourcing inputs via importing. Furthermore, it is likely that the Treasury's sample of exporting businesses is somewhat biased, as the exporters visited are those that have survived and have learned to live with a high NZD. Officials received some reports of the high NZD adversely affecting exports to the UK, Europe and the US. There are fears that an economic slowdown in Australia could adversely affect exports into that market, despite the NZD/AUD cross-rate being below its long-run average.

The farming sector is something of a mixed bag. Dairy is still going well with strong global demand for protein and a drought in the US constraining international supply. Dairy production this year is expected to be at a similar level to last year's high level, aided by supplementary feeding and other productivity enhancements. Global demand for beef is still high and increasing; the outlook for lamb is not quite so positive.

... as firms keep costs under control...

One common theme of these business talks was that firms are trying to cut costs in an effort to maintain or increase profits. This is not easy as just about all input costs have increased, e.g. gas, electricity, insurance, local authority rates, fuel, construction costs and wages. Insurance costs were particularly mentioned as having had large increases, with reports of 100% increases not uncommon.

Firms are employing a variety of strategies to keep their costs down, including:

  • reducing rents, particularly some retailers negotiating reductions with landlords;
  • importing, i.e. reducing costs by sourcing inputs from overseas rather than locally;
  • making better use of technology to reduce administration costs;
  • better use of staff rostering to reduce employment costs; and
  • reducing total staff numbers.

Recent wage increases have generally been in the low single-digit percentages, i.e. around about the rate of CPI inflation. Plans for wage increases over the next year are also in the low single digits, mainly clustered around 2-3%. Some contacts believed that the earthquake rebuild is unlikely to put excessive pressure on wages as there is a large pool of workers to draw on, especially if the rebuild attracts workers from overseas. Others took the opposite view, noting that they had already seen rebuild-related wage pressure coming on.

On balance, employment was probably 'flat'. There were reports of hiring in IT and logistics/transport firms, and reports of lay-offs in publishing and retail, although there may be some re-hiring to come in retail with some national chains planning to expand their networks. The majority of businesses said that they were maintaining employment at current levels. Employers will look to exploit existing capacity in their workforce before they recommence recruitment.

... leading to increased profits

As a result of managing their costs, most businesses reported increased profits. Some said that profits were flat or down, but others said that they achieved record profits last year. The accounting contacts believed that aggregate profitability across their client bases was consistent with the 10% annual growth seen in company tax recently (see www.treasury.govt.nz/government/revenue/taxoutturn).

What does this mean for the Treasury's 2012 forecasts?

Overall, the tenor of these talks was consistent with the Budget Economic and Fiscal Update (BEFU) forecasts for 2012 to date, perhaps a little more positive than expected. This is broadly in keeping with the solid performance of the economy over the first half of the year.

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