Treasury staff insight

FEU Special Topic: Business talks

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FEU Special Topic: Business talks

Between 20 February and 8 March, officials from the Treasury met with a range of businesses and organisations to discuss the outlook for the economy.

Most businesses indicated that demand was holding up, while the outlook for the economy over the medium-term was a lot more uncertain. Regardless, firms believe that the economy is headed for a gradual economic slowdown set off by lower consumer spending, continued house price weakness and a general cooling in the labour market. Further, there were concerns about the state of the global economy and how this will impact demand for New Zealand-based good and services.

The impact of the floods will become more apparent over time

While the economic impacts of the floods are very localised at the moment, the impacts could spread to other regions in time to come. The impact on the horticulture sector will be felt via damaged infrastructure, poor harvest quality (partly due to labour constraints) and reduced export volumes and prices. Concerns were also raised regarding potential lags in insurance pay-outs and long lead times to get the necessary building and other materials.

Although demand is holding up, there are signs of a slowdown...

Demand for most goods and services have been elevated ever since the easing of COVID-19 related restrictions. However, most participants feel that demand growth over the medium term will flatten out, or possibly even turn negative.

Some of the early warning signs participants are attuned to are broadly consistent with those revealed in business sentiment surveys. These include: a prolonged slowdown in consumption, company credit defaults in the residential construction sector, banks being more risk averse and restricting lending to existing clients, continued labour market pressures and shortages in certain sectors, the high interest rate environment, that in turn lowers household incomes.

The tourism industry is booming again, with visitor numbers on the up...

The tourism industry is back at pre-COVID-19 levels, with prices up considerably. The upper end of the market is seemingly unaffected by price sensitivity, which has resulted in high yields, helping firms to catch up on COVID-19 related losses. Although mostly comprising local and Australian tourists over the last year, the arrival of the Asian market later in the year will improve trading conditions further (assuming more relaxed travel restrictions in these regions). This will be partly offset by more New Zealand residents travelling abroad.

Construction activity is showing signs of slowing

The construction sector reports slowing house prices and higher interest rates are affecting residential construction, however commercial construction remains relatively robust. Some participants highlighted that increasing attention is being given to credit defaults and lending criteria. Although this is not uncommon in the construction sector, further downward pressure on house prices, increasing input costs and staff availability could exacerbate this.

The need for skilled and unskilled labour remains high

The local labour market remains tight, with firms finding it hard to fill most specialised vacancies. The anticipated softening in economic conditions over the coming months could also ease some of the labour market pressure in sectors that employ less skilled and more temporary workers, eg, retail and other consumer-facing sectors.

Wage demands are still elevated due to the high cost of living and a constrained labour market. In the past year, firms were able to attract workers from competing firms via higher wages. However, there seems to be less appetite for this going forward. Similarly, firms indicated that double-digit wage increases will be restricted to highly-skilled labour going forward.

In general, firms reported that immigration policy has moved in the right direction, but express some frustration regarding the time to process applications. In some regions, the lack of housing and housing affordability hampers firms when it comes to attracting and retaining staff.