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During the final week of October and early November, officials from the Treasury met with a range of businesses and organisations around the country to discuss the outlook for the economy. The information gathered is used to inform the Treasury’s HYEFU 2018. While business and consumer confidence are below their historical averages, businesses are generally optimistic and are still seeing good sales growth. This special topic summarises the views of businesses we visited.

The focus of these talks was on four sectors that are important in the current economic environment: construction, retail, manufacturing and agriculture. Officials were interested in the current state of the whole economy, but these sectors particularly, and what the prospects are for both short- and long-term activity.

Sales activity has moderated…

The experiences and views on the outlook differed across the businesses but appear consistent with growth continuing around current rates over the next year. Some businesses said that sales have been fairly flat or declining since March while others said that growth has been strong. While business and consumer confidence measures are below their historical averages, businesses we visited are generally optimistic and are still seeing good sales growth (Figure 1). High petrol prices, high levels of household debt and increasing online sales were cited as possible reasons for lower retail sales activity. Car import volumes, seen to be a leading indicator of household consumption, are down.

Figure 1: Trading activity

Figure 1: Trading activity

Source: NZIER, ANZ

While conditions look favourable for the construction sector, competition and cost pressures, as well as concerns about procurement processes and contractual arrangements, and pricing policies are making conditions very challenging and squeezing margins. Manufacturing companies are seeing steady growth, with strong demand from both the domestic and international markets. Manufacturers supplying into the construction market are benefiting from growth in this sector.

…but tourism is still expanding

Businesses reported that the tourism sector is still expanding, but at a slower rate than previously, mostly owing to competition from other destinations. Visitor arrivals from the USA, China and Europe have increased. While domestic and trans-Tasman passenger growth has been strong in some regions, other regions e.g. Auckland, have seen flat or falling growth in domestic numbers because of high accommodation prices.

Cost pressures are rising…

Input costs are rising, especially for fuel and labour, and the weakening exchange rate is putting further pressure on importers. The exchange rate has however appreciated in recent weeks which, combined with lower international oil prices, has seen petrol prices ease back. Electricity supply shortages are also pushing up wholesale electricity prices, adding to cost pressures. Most firms planned to absorb these costs and had strategies in place to increase sales and/or productivity. Firms were reluctant to pass on costs through higher prices, citing strong competitive pressures. However, some conceded that they would be forced to increase prices in coming months.

The dairy sector is facing challenging conditions with lower prices and higher costs, but sheep and beef farmers were doing well.

Mounting cost pressures in the insurance industry go beyond rising costs associated with natural disasters. For example, there is pressure on motor vehicle insurance. While volumes are growing, new technology in vehicles is pushing up the cost of repairs. The construction sector is also facing cost pressures, brought about by higher asking prices by sub-contractors and higher materials prices.

…and the labour market remains tight

Labour markets are generally seen to be tight, but wage inflation remains low. Some wage pressure is expected for lower-income roles as the effect of wage settlements, union negotiations and minimum wage increases come into effect. These wage pressures are forcing some companies to think about ways of increasing labour productivity.

Union membership is increasing with general sentiment that profits are rising but wages have not been. Industrial action is becoming more prevalent, particularly in lower wage industries.

Many employers are aiming to attract and keep staff by standing out as a “good employer” by offering benefits such as flexible working arrangements and promotion opportunities. Many companies said that it is hard to attract employees to Auckland because of the high cost of living and many are facing significant training costs and high turnover, particularly in the lower skilled workforce. More remote regions and farms also have difficulty finding labour. Some companies are concerned that immigration settings are making it harder to find labour.

There is still strong demand for skilled labour and many firms cited difficulty finding skilled labour (Figure 2).

Figure 2: Difficulty finding labour and unemployment

Figure 2: Difficulty finding labour and unemployment

Source: NZIER, Stats NZ

Businesses continue to invest…

The state of current infrastructure and low levels of investment, particularly in roading, are seen as a constraint for business growth. This is particularly problematic in Auckland where businesses are facing increasing logistical costs and delays.

Firms reported that they have had to increase investment in cyber security as online threats become more prevalent and sophisticated. For some firms providing these services, this has resulted in increased growth and opportunities to drive innovation in product offerings. Investment in automation is also increasing as the cost of labour increases.

Businesses are investing in their own infrastructure but some are finding it difficult to find trusted companies and contractors to complete building projects and refurbishments. The private construction market is reasonably buoyant with good subdivision work but the housing market is seen as slowing and as a result access to finance for developers may be becoming more constrained.

Dairy farm conversions have slowed. Banks are reluctant to lend to dairy farmers and the possibility of interest rate increases are a concern. However, substantial on-farm investment opportunities remain to improve efficiency and meet regulatory requirements.

Universities are not seen as being capacity constrained, so fees free tertiary education is not expected to crowd out international students. International competition from countries like Canada and Australia could significantly affect international student numbers.

…and credit availability is good

Credit availability is generally good and not expected to be a concern for most companies in the near future. Several firms noted that they were oversubscribed when raising capital in overseas markets.

Government policy has a part to play

Generally the companies we visited still seemed positive about their current activity but many are increasingly concerned about maintaining profit margins. Some expressed concern that this challenging outlook is being compounded by uncertainty surrounding upcoming policy changes.

Many companies told us that they feel that Government has a part to play in general infrastructure improvement, smoothing business cycles and providing continuity through changes in government, reforming pricing policies in the construction sector and providing more certainty around proposed policy changes. They would also like to see Government involved in renewable energy investment incentives and improving access to fast internet and recycling initiatives. Global risks remain a concern for most companies we visited.

Talks largely confirmed our judgements

While business and consumer confidence measures are below their historical averages, businesses we met with are generally optimistic and are still seeing good sales growth. The talks confirmed other information over the past months suggesting that electricity generation constraints may have a small negative impact on growth in late 2018. The information gathered has helped inform the HYEFU 2018 forecasts which will be released on 13 December.