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Special Topic: Business Talks
During September 2024, Treasury officials met with a range of businesses and organisations to discuss business conditions and the outlook for the New Zealand economy. The Treasury typically conducts business talks as part of the preparation for our Economic and Fiscal Update forecasts that will be published in December.
Business conditions reflect an economy at or near the bottom of the cycle
The general feeling among firms was that the economy is at or near the bottom of the economic cycle. Firms were expecting demand and activity over the remainder of 2024 to be soft but anticipated a pickup in 2025, as falling interest rates stimulate household spending and business investment. Firms with stronger balance sheets have been less affected by the downturn and are positioning themselves to take advantage of the expected recovery in 2025. However, highly leveraged firms were struggling.
Retail and hospitality sectors are struggling
Firms in the retail and hospitality sectors were more pessimistic than in other sectors, with some retail firms reporting weaker activity than during the Global Financial Crisis. Household balance sheets are constrained, and spending is down sharply in the last six months.
Falling interest rates will support a weak construction sector
The residential construction sector is struggling from low activity. However, commercial construction firms were performing slightly better given the longer lead times and less-cyclical nature of commercial construction. Residential construction firms reported an increase in enquiries since the Reserve Bank’s cut interest rates in August. However, this initial interest has yet to translate into sales and firms thought further cuts were needed to provide developers and households with the confidence to “pull the trigger” on new residential property.
Increases in export commodity prices have provided a boost for the primary sector
The primary sector outlook has improved in the past few months, buoyed by increases in export commodity prices. Higher prices are set to improve profitability for farms this season. However, poor profitability in previous seasons has led to higher debt and deferred maintenance, so paying down debt and catching up on farm maintenance were priorities.
Inflation pressures are easing
Firms reported that general inflationary pressures are easing, but pockets of pricing pressure persist. Notably, import price inflation for inputs such as fuel and fertilisers has eased, and in some cases prices were declining. Shipping costs are elevated, but nowhere near the highs of early 2022. Firms reported cost pressures for insurance, electricity, and rates and noted that weak demand was limiting their ability to pass on costs and improve profit margins.
The labour market has cooled
Demand for labour continues to ease, with more redundancies expected in the next three to six months and wage growth slowing. In general, businesses were finding it much easier to find labour and turnover is low. However, labour shortages were reported in specialised roles across several sectors, including construction, and firms are still paying a premium for talent in most sectors. Many larger firms have already reduced their staff numbers and have focused on improving cost efficiency and productivity. However, smaller firms have tried to hold onto staff and are now facing the decision of whether to cut back. Many firms reported they were investing in automation in a bid to reduce their reliance on labour and lift productivity.
Capital investment outlook has improved
The outlook for capital investment has improved, with an increased availability of contractors, inflation falling, and capacity constraints easing. Many businesses will be looking to undertake deferred investment as interest rates ease. Furthermore, firms with stronger balance sheets were reportedly positioning themselves to take advantage of improved demand conditions by investing in plant and machinery or looking to mergers and acquisitions.