Posted: 
Thursday, 12 Dec 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.

Special Topic: HYEFU 2019 Business Talks

In late September, officials from the Treasury visited a range of businesses and other organisations to discuss the outlook for the economy.

Overall, the sense gathered was that businesses are doing okay, with economic growth expected to continue albeit at a lower level. This overall picture is somewhat at odds with business confidence surveys, such as the Quarterly Survey of Business Opinion (QSBO), which indicates more of a negative sentiment among businesses. Indeed, some businesses commented on this, noting that demand from other businesses for their products is stronger than they would expect given surveyed business confidence levels.

Many businesses expressed uncertainty about the future - both in terms of the international outlook and in terms of domestic conditions. Uncertainty over future policy developments was a common theme. Businesses also commented that they are facing compressed margins - with rising costs (labour, in particular) combined with an inability to increase prices.

Demand remains strong in some sectors…

Most businesses had a positive outlook about demand for their products. Businesses commented that residential and non-residential construction is strong, that there is good demand and high prices for agricultural products, and steady manufacturing demand.

Companies in the retail and tourism sectors commented that they expected demand growth to be lower than previously, but are not expecting a fall. Some tourism businesses noted that growth in recent history had been very high, so were comfortable with the respite of a period of slower growth.

Commodity exporting businesses mentioned concern over the global economic environment (slowing worldwide growth, and uncertainty from the US/China trade war and Brexit); however, they commented that nevertheless they expect demand for their products to hold up.

… and the labour market is very tight

Most firms stated that it was very difficult to find labour, consistent with data from the QSBO and low unemployment levels. Some businesses also commented that they were facing issues with delayed work visa approvals, particularly problematic where foreign labour use was particularly high (such as hospitality businesses in tourism centres).

Businesses reported that they are seeing higher than normal wage inflation due to minimum wage increases and the tight labour market more generally. Some businesses reported that the minimum wage increases have flowed on to higher wage expectations for higher-paid staff, to ensure relativities are maintained.

Businesses are facing squeezed margins...

Many businesses reported that they are facing squeezed margins - with rising costs but an inability to pass these on through higher prices. This inability was often attributed to the internet, due to the impact it has had on both price transparency and increased competition from offshore.

Some businesses commented that they are able to ameliorate this margin squeeze by reducing their reliance on labour (for example, in the retail sector, by increasing focus on online sales, which is a less labour-intensive sales channel) and by seeking lower-cost inputs, particularly from offshore. However, these businesses noted these measures only partially offset their margin squeeze; overall, the profitability outlook is weakening.

…and business investment is slowing

Businesses commented that credit conditions are generally good with very low interest rates. Despite this, most firms we visited were not planning large-scale investment in the near term. Uncertainty was a common reason for this reticence, with businesses citing factors including:

  • the slow-down in expected economic growth internationally
  • the August cut in the OCR by 50 basis points, with some businesses taking the unexpectedly large cut as a signal that the economy is slowing more than anticipated
  • capacity constraints in the construction sector making it difficult to take on new large-scale projects
  • concern over potential changes in Government policy - with the Zero Carbon Bill and the Essential Freshwater changes cited as examples.

A few businesses also commented that the pipeline of future major infrastructure investments is unclear. They noted that several large investments are nearing completion, and that they are unsure if there will be new projects to move onto once those are completed. These businesses expressed a risk that, without a clearer pipeline, workers will move to Australia resulting in an erosion in our future capacity for large-scale infrastructure projects. The New Zealand Infrastructure Commission has subsequently published an updated pipeline of New Zealand's planned infrastructure.

Sentiment among farmers is particularly low

A common theme was that confidence among farmers was very low - due to concerns over potential changes in Government policy (water quality and climate change).

Farming businesses expressed concern about the Zero Carbon Bill and potential changes to the Emissions Trading Scheme. Farmers were aware of the long-term price indications used in reports, such as the Productivity Commission report on the transition to a low carbon economy, so had a sense that emissions prices would be higher at some point in the future and that they would be exposed to those prices.

Farming businesses also mentioned that commodity prices are elevated at present, creating some room to absorb costs from new regulations. However, they noted that commodity prices are volatile, so there is concern about the impact of any new regulations should prices fall.

Join the discussion on LinkedIn