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Special Topic: Business Talks
Through March, the Treasury and Reserve Bank met with a range of businesses and economists from New Zealand (NZ) organisations. These insights inform our understanding of the business environment and will feed into our forecasts in the upcoming Budget Economic and Fiscal Update published in May.
Businesses are proceeding with caution...
To date, New Zealand businesses are reporting that they are proceeding with caution and are anticipating business conditions to improve in 2026. Our talks confirm that the economic recovery is emerging in particular sectors with business confidence elevated since our previous discussions in September.
Retail and construction firms’ activity remains subdued as the falls in the Official Cash Rate (OCR) have yet to pass through to household consumption, while persistently high costs further constrain household spending. Businesses involved in tourism and commodity exports were more optimistic amid favourable operating conditions. The divergence in trading conditions between export and domestic orientated firms was also highlighted in our previous Fortnightly Economic Update. December quarter GDP data confirmed that construction and retail trade was weak, while travel service exports had surged. On top of that, agricultural incomes have been supported by strong commodity prices recently.
...Facing a two-speed economy with weaknesses in city centres
One of the most notable themes we observed were of an economic divergence between rural and metropolitan regions. The strongest rural performers were in the Canterbury region, while the weaker metro areas were Auckland, Wellington and Hamilton. New Zealand economists’ judgement corroborated an emerging metro-rural divide, noting residential construction weakness in cities. Construction firms observed that improving working from home arrangements likely drove relatively stronger housing activity in Taranaki and Otago regions. While internal migration throughout New Zealand was at play.
Regions with a concentrated primary industry found economic support through the so-called ‘perfect trifecta’ of factors. Favourable pasture growth conditions, a weak NZ dollar and high commodity prices has lifted on-farm profitability. Record high prices and easing on-farm inflation has provided a welcome relief to dairy, beef and lamb farmers, who previously faced squeezed margins.
Rural retailers reported that recent profit optimism led to a pick-up in sales of farm consumables. Some farmers have also resumed new or previously deferred capital investment. However, balance sheet repair and debt repayment remain priorities. Rural New Zealand remains cautiously optimistic, operating in an encouraging but globally uncertain environment.
Soft labour market makes it easier to find labour
Hiring managers reported an overall improvement in labour availability. Firms received more applications for job advertisements from candidates with relevant experience and skills. While business confidence surveys have shown improving employment intentions, our talks indicated that firms have low hiring intentions in the near-term, while others are looking to scale back staff to manage high operational costs. Businesses expected average wage settlements of 2-3% in the coming year, aligning with the labour market’s current high supply and low demand conditions. These talks were broadly consistent with what we’re seeing in the monthly employment data.
Compared to unskilled labour, firms also say it’s harder to find skilled labour, particularly among construction and manufacturing firms looking for highly skilled and specialised staff. Firms shared their concerns about losing workers to overseas, noting Australia’s comparatively stronger financial and labour market incentives to attract employees.
Global uncertainty weighs on optimism
New Zealand firms with a strong balance sheet remain committed to their long-term investment plans. A strong financial position can guard against short-term variability, allowing businesses to take opportunities when identified. Although firms commented on heighted trade tensions reducing general optimism, it was current trading conditions that really drove some investment decisions. US trade uncertainty was a key theme of our talks but there were few signs that this has had an impact on investment or decision-making at the time.
Housing construction passed its trough, but growth is slow
Consistent with the housing market data, the insights from construction firms pointed to gradual improvements to New Zealand’s housing market since its recent 2023 low. However, we’re hearing that elevated housing stock – both on-market and from additions of new developments – is constraining residential investment and suppressing price growth. Although regions like Taranaki performed stronger than Auckland, there is a nationwide trend favouring renovation projects over new builds. Property developers also noted that lead times in consent issuance for projects on flood-risk land further slowed construction activity.
As interest rates have eased, housing developers have noticed an increase in enquiries nationwide. This is yet to be converted into tangible projects and activity.