Treasury staff insight

FEU Special Topic: Business talks

The Treasury
Publication type:
Publication category:

Staff and teams are writing in their individual capacity and the views are not necessarily a "Treasury" view. Please read our disclaimer.

FEU Special Topic: Business talks

Between 31 August and 16 September 2022, officials from the Treasury met with a range of businesses and organisations to discuss the outlook for the economy.

In general businesses were cautiously optimistic about the medium-term outlook for the economy. However, uncertainty associated with the state of the global economy and various domestic constraints dampened the sense of optimism. The main pressure points included ongoing labour shortages, frustration with low immigration and a squeeze on profitability owing to rising costs. Many of the participants felt that widespread worker shortages represent the largest supply side constraint, and that this will have a significant impact on the post COVID economic recovery.

Demand is holding up relatively well across the economy

Businesses report that demand for goods and services is holding up relatively well throughout the economy, even after two consecutive years of strong growth in consumer spending and residential investment. During COVID debt was cheap and consumers were largely restricted to spending locally, resulting in strong sales including real estate. Although the cost of investment has increased, businesses indicated ongoing access to credit.

While businesses are optimistic about the state of the economy, most feel that demand growth over the medium term will flatten out. International tourism related sectors were the exception with the return of international tourists expected to drive a recovery. Additionally, strong wage growth over the past year will assist in maintaining consumer purchasing power.

...but consumers are more mindful of how they spend...

Businesses are noticing that consumers are starting to show signs of price sensitivity, while others are delaying decisions around business investment. This is consistent with consumer confidence surveys showing that less people think now is a good time to make a major purchase and weak confidence overall.

Construction activity showed signs of slowing in the June 2022 quarter (especially in the Auckland region) as interest rates rose quickly, but the recent stabilisation in mortgage rates will likely see some activity return to the market.

Although consumer confidence recovered after the initial COVID lock down, it is still not anywhere near pre-COVID levels. If anything, consumer confidence has worsened over the last 12 months.

The inflationary environment is not abating...

The impact of a sharp increase in fuel prices, coupled with high commodity prices as well as increasing labour costs is resulting in significant cost pressures for business. Firms anticipate that elevated fuel prices together with wage pressure will prolong the current high inflationary environment (even with interest rates increasing).

When demand was increasing, businesses found it relatively easy to pass on the full costs of higher input prices to consumers and other businesses. Businesses signalled that there are still considerable cost increases occurring that they will try and pass this on. However, this could change, as businesses are foreseeing a more competitive pricing environment to unfold in the coming months.

...and the need for skilled and unskilled labour remains high

With the borders closed to foreign workers for most of the past two years, the local labour market remains tight. Firms are finding it hard to fill most roles, resulting in significant wage increases to lure workers from competing firms and sectors. Firms are also seeing an increase in sick leave being used, resulting in additional pressure on already constrained human resources.

COVID disruptions and worker fatigue coupled with a tight labour market has resulted in some employees being asked to work longer and more unusual hours than normal. Firms feel that this is not sustainable in the long haul and therefore some businesses are purposefully reducing their offering of goods and services.

Labour shortages are seen as the largest constraint for a post COVID economic recovery. Whilst visa applications have picked up markedly throughout 2022 some businesses indicated a lack of confidence in immigration settings and operation. Others feel that New Zealand is becoming a less attractive destination for highly skilled migrant labour as places like Australia and Canada make it easier to attract and retain these workers.

Recovery in the tourism sector depends on many factors

International tourism remains well below pre-COVID levels and is expected to take time to recover. Initially a significant portion of arrivals will have been ‘friends and family’. Longer-haul tourism is only just getting underway and there is uncertainty around how bigger increase we will see for the 2022/23 season given longer lead times. Similarly, the Chinese market remains closed while the Chinese Government continues with its zero-COVID policy.

Recovery in the tourism sector will be a function of getting the right number of workers on time, the extent of the rebound in the airline and associated industries and an improvement in the global economic climate.

Cost pressures will lead to margins being squeezed in the coming year...

Many firms experienced significant profit levels in the 2021 and 2022 years. Government’s COVID-19 stimulus package helped the domestic economy through most of the pandemic. However, subsequent higher interest rates, increasing labour and input costs, continuing supply side constraints and increased New Zealand resident spending abroad will make for tougher trading conditions in the medium term.

In the horticultural sector, unfavourable weather events and the lack of workers impact the quality of fruits that are harvested, resulting in lower prices. While shipping and logistical constraints and cost increases add further pressure on the industry. firms respond to these challenges

To mitigate against supply chain disruptions a lot of firms have increased orders and stock levels. Some firms are sitting with high inventory levels and expect to run these down over the coming months.

The pandemic has driven considerable change to business processes and firms are investing in information technology systems to be more efficient. Working from home is thought to be an enduring feature of the employment landscape bringing both advantages and disadvantages, especially regarding demand for office space and activity in central business districts in larger cities and towns. The impacts of this will become more evident as the world returns to some level of normality.