Monday, 23 Nov 2020
View point: 
The Treasury

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

Special Topic: HYEFU Business Talks

Between 28 October and 4 November 2020, officials from the Treasury met with a range of businesses and organisations to discuss the outlook for the economy.   

Most businesses reported being cautiously optimistic about further increases in activity following the initial recovery from Alert Level 3 and 4 restrictions. The sense of cautious optimism is mostly driven by perceptions that New Zealand has handled the COVID-19 outbreak well, and by the relatively low number of new and active cases. Some firms indicated that the optimistic economic outlook was conditional on a partial reopening of the border to international travellers.

Many firms see heightened uncertainty ahead related to the global economy and future impacts from COVID-19.

Higher alert levels resulted in a short, sharp shock for most…

Firms deemed non-essential experienced significant reductions in output and revenue during Alert Level 3 and 4 restrictions. Some essential business, such as supermarkets, experienced a significant spike in sales, as well as higher costs for additional security, cleaning and personal protective equipment.

With the easing of restrictions, most businesses reported faring reasonably well, and are starting to recover some of the losses experienced during level 3 and 4 restrictions. The general sense is that firms and sectors can be broken down into three categories; a) those that are still struggling to recover from the lockdown, b) those that are doing enough to survive by capitalising on strong domestic demand, and, c) those that are thriving thanks to strong domestic demand and/or exports. 

Sectors that are showing strong levels of activity include the primary sector, retail (more specifically food products), healthcare products and information and communications technology.

…with tourism and hospitality bearing the brunt…

Sectors reliant on international travel and tourism were the hardest hit, and continue to be affected by current border controls. In addition, international student numbers are down significantly, resulting in flow-on effects for the domestic education market. 

A number of tourism-related businesses reported that domestic travel has helped support the sector over winter – even though demand has been more concentrated on weekends and school holidays than usual. But given that the usual increase in international visitors over the summer months is no longer possible, businesses are not expecting to benefit much from the usual spike in activity.

Some businesses indicated that the uncertainty around the reopening of the border is of great concern to them, and that this will directly impact investment decisions going forward.  These firms stressed the need to create a bubble with Australia as soon as the COVID-19 situations improves. This is seen as a lifeline to sectors and regions reliant on foreign tourists, allowing future recovery.

Employment was supported by the wage subsidy…

Many of the firms made use of the wage subsidy scheme and indicated that it was instrumental in keeping people in jobs and production lines in a position to continue as the alert levels were eased. However, some participants suggested that the cessation of the wage subsidy might result in some staff reductions. Some firms reported investing in technological advancements and a shift towards more online trading.

Firms also highlighted the fact that COVID-19 seems to have altered the way in which they work and operate, with more workers working remotely, even post Alert Level 4.  

…with signs of labour shortages in the primary sector, and job losses elsewhere…

Labour supply was becoming a constraint on some firms in the primary sector, with border restrictions increasing the difficulty of finding seasonal staff. In more specialised sectors, e.g. engineering and financial services, some firms reportedly found it difficult to find highly specialised workers that would in some cases be sourced from abroad, or that would form part of international secondment programs. 

Apart from the sectors mentioned above, the general sense is that firms are receiving more qualified applications per vacancy advertised than before COVID-19. In some sectors there also appears to be lower staff turnover, possibly indicating fewer jobs being advertised.

Relatively strong export growth post Alert Level 4...

Firms that export goods and services indicated that exports have been fairly resilient to the impact of COVID-19, especially for premium brand and value-add products. Some sectors have also been able to redirect products from export markets to the domestic market.  It was reported that sales to traditional trading partners (China, United States and Australia) remain strong, especially in the food and beverages sector.  There also seems to have been strong growth in non-tourism service exports, especially in the information technology field.

However, COVID-19 has highlighted some risks associated with New Zealand's geographic isolation. Exporters highlighted the fact that the country seems to be at risk of being cut out of logistics markets and movements in times of global pandemic. In addition, there were added capacity constraints due to changes in trade routes and managing crews.

With solid domestic demand…

Participants were of the view that domestic demand and general consumer confidence have rebounded after Alert Level 3 and 4, and that domestic demand might continue to be strong over the remainder of 2020, but with more uncertainty thereafter. 

This is in line with recent indicators of consumer confidence (Figure 1), however it should be noted that consumer confidence has not yet recovered to pre COVID-19 levels.

Figure 1: Consumer confidence 

Figure 8: Consumer confidence

Source: ANZ- Roy Morgan

Businesses are taking a cautious but long term approach to investment…

Although access to credit was not an issue for most businesses, there was a sense that business investment was being limited to preserve cash flow. In other instances, investment decisions were focussed at in-store infrastructure investment, and increased investment targeted at generating online sales.   

…while other investments remain on hold…

Although the construction sector has seen record demand on the residential side, some commercial projects have been put on hold. In some cases work that had been delayed is now returning, however it seems the pipeline of activity from early next year is looking less clear.

There are some specific concerns to keep in mind…

Although a large group of firms across various sectors was able to survive the first round of increases in alert levels, and many the second round in Auckland, some indicated that their capacity to manage future increases in alert levels was reduced.

Lastly, current supply chain disruptions are concerning, and the situation could deteriorate with new waves of COVID-19 outbreaks, especially among our trading partners.

Join the discussion on LinkedIn