Posted: 
Tuesday, 2 Apr 2019
View point: 
Personal (opinion)

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

AUT University

During the first two weeks of March, officials from the Treasury met with a range of businesses and business organisations around the country to discuss the outlook for the economy. The information gathered informs the Treasury's 2019 Budget Economic and Fiscal Update (BEFU). 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, tourism, retail 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.

Most of the businesses visited have seen slower growth over the past year but remain optimistic about the outlook. While growth is generally expected to be reasonably flat in the coming year, businesses reported that they do not expect to see a significant deterioration. Many companies added that business conditions have been very good over the past few years.

Sales activity weakened

Businesses told us that, over the past 6 months, weakened consumer sentiment (Figure 1), rent inflation, slower house price growth, the rising cost of living and uncertainty around capital gains taxes have weighed on retail growth. The Retail Trade Survey shows that total retail sales were softer in the September quarter but bounced back in December, however, values and volumes continued to weaken in some industries in the December quarter.

Figure 1: Consumer Confidence

Figure 17: Consumer Confidence

Source: ANZ, Westpac

There has been a noticeable shift in consumer spending patterns; while November sales surrounding Black Friday and Cyber Monday were strong, Christmas sales were slow and have softened further through the start of the year. Sales in large centres remain competitive but have slowed in smaller regions. This may in part reflect sentiment of farmers and smaller communities. Consumers are more reluctant to take on interest-accruing debt, opting instead for interest-free and part-pay programmes or curbing spending on more expensive discretionary items, in favour of consumables and travel. Online sales continue to grow.

Overall businesses expect flat growth through the rest of the year.

International travel remains strong but growth in tourism is weaker

The travel sector has seen strong growth in discretionary international travel over the past year and expects favourable conditions to continue, but messages around domestic travel spending were mixed, with some seeing continued growth in spending and others experiencing reduced demand. Tourism has passed its peak growth phase and while inbound tourism is still positive, there is a heightened sense of geopolitical risk and an associated downturn in visitor arrivals, particularly from China. Note that the business talks took place prior to the tragic events in Christchurch; this may to add further short-term downside risk to tourism.

Cost pressures are mounting…

Businesses reported higher cost pressures and compressed margins across all sectors of the economy (Figure 2).

Figure 2: Average costs

Figure 18: Average costs

Source: NZIER

Some expressed concerns about increasing costs associated with shipping and lower sulphur emissions requirements, and the extent to which the associated costs can be passed on to consumers.

Increased competition and a higher level of price transparency in the retail sector means that cost pressures need to be absorbed, squeezing margins. Some companies aim to raise profitability by increasing the volume of goods they sell in this competitive price environment.

Growth in the construction sector has come off its peak but is still above its long run average. Market conditions are getting tougher with competition putting pressure on margins, increasing the risk that we could see further company failures in this industry. While firms are optimistic that the new retentions regime is a good policy in the long term, they did raise concern that margins would have to increase for firms to remain profitable due to costs associated with higher capital requirements. Construction firms reported opportunity and momentum in Auckland and the lower North Island, with weaker growth elsewhere.

…and the labour market remains tight

Firms reported wage pressures and difficulty finding the right skills, particularly in information technology, finance and construction.

Some firms reflected that changes to migration settings are placing further constraints on business growth. Some businesses feel that tighter migration settings have led to lower productivity as they rely on migrant workers for night shifts.

Many businesses reported that the expectations of unions have increased, raising the risk of further wage pressure in coming years. Employment numbers remain broadly stable, however some firms are planning to reduce employee numbers over the next year as they close unprofitable branches and introduce automation and other productivity enhancing measures to offset rising wage costs.

While a number of firms already pay above the minimum wage and do not expect increases to the minimum wage to materially affect them, others are concerned about their impact on the rising wage bill. These firms hope to introduce measures such as new remuneration structures and business practices to better align with profitability.

Companies are also hoping to attract or retain employees by introducing more flexible working arrangements, including part-time roles.

Business investment has slowed…

Most of the firms we visited are not planning expansion or large scale investment in the near term while others are scaling back operations. Uncertainty around upcoming policy changes is holding back investment for some, particularly in the agriculture sector. Businesses continue to invest in IT solutions and automation as well as improving their stores, refreshing their brands and advertising. Many firms expressed a desire for more investment in infrastructure, hotels and airports as these are constraints to their business growth potential.

The agriculture industry has been doing well but uncertainty around government policies is holding back investment. High dairy and sheep and beef prices continue to support spending on farm.

…but credit availability is good

Credit conditions remain good for most businesses we visited but it is getting harder to borrow in the agriculture and construction sectors. Many businesses continue to look for efficiency gains, including merger and acquisition opportunities.

Government policy has a part to play

Generally the businesses 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 policy proposals such as Capital Gains Taxes.

Many businesses told us that they feel that Government has a part to play in general infrastructure improvement, smoothing business cycles, and providing more certainty around proposed policy changes.

Talks largely confirmed our judgements

The business talks largely confirm our judgements about the current economic environment. While business and consumer sentiment has been weaker and the outlook for growth is fairly muted, businesses do not expect a significant deterioration in their outlook.

Join the discussion on LinkedIn