Pessimism Eases Slightly

17 May 2005

Pessimism Eases Slightly

Expectations for the NZ economy remain fairly poor with a net 50% of respondents to our fortnightly survey sayiing they expect the economy to get worse over the coming year. This reading is down from a net 62% a fortnight ago and 56% a month ago but is still at a bad enough level to leave one on safe ground when saying things don’t look too good.

Interestingly the result is a bit like that just produced by the monthly One News Colmar Brunton poll of consumers. It showed a net 13% of consumer respondents expecting the economy to deteriorate over the coming year. This is well below the ten year average reading in the survey of +15%, but an improvement from the net 17% pessimistic in the April survey.

So perhaps what the surveys are telling us is that there is not a straight line deterioration in sentiment toward oblivion – just the coming together of a number of concerns and perhaps the ending of an extended period of positive surprises. Some obvious candidates for recent concerns our respondets are likely to be acting on include the following.

Media reports of a small fall in the sharemarket three weeks ago.

The foot and mouth scae on Waiheke Island (pessimism has reduced in spite of this).

Exporters being affected by the high exchange rate and hedging rolling off.

The Reserve Bank making some strong warnings about interest rates.

Costs rising across the board – and the strongest wage pressures in many years.

Continuing labour shortages.

Increased talk of the housing market easing off.

Some obvious difficulties with addressing infrastructure constraints facing our economy – eg power line placement.

Survey Date / Better % / Same % / Worse % / Net % / # of respondents / # of comments
17 February / 20.3 / 41.1 / 38.5 / -18.2 / 423
3 March / 17.2 / 40.2 / 42.6 / -25.5 / 687 / 224
17 March / 8.5 / 36.5 / 54.9 / -46.4 / 550 / 294
31 March / 6.1 / 27.7 / 66.2 / -60.1 / 393 / 201
13 April / 6.0 / 31.8 / 62.2 / -56.3 / 336 / 165
28 April / 6.2 / 25.6 / 68.2 / -62.1 / 340 / 185
12 May / 7.2 / 35.2 / 57.6 / -50.3 / 304 / 148

INDUSTRY COMMENTS FROM THE MAY 12-16 SURVEY

Throughout the comments this fortnight there is more evidence of restraint. Howevere there is also a good smattering of comments from firms showing activity is still firm in their areas. So the picture painted is not one of widespread gloom even though in some sectors like forestry and fishing things are very poor. The real estate comments lean toward the negative with the main thrust seeming to be some vendors being unrealistic in their price setting when buyers have become more cautious. Labour shortages abound.

Accountancy
Satisfactory. Should remain about the same as at present.

Busy as usual.

Accounting staff are rare.

Chartered Accontancy, very strong demand for business services.Hamilton City businesses experiencing still strong demand and both commercial and residential real estate are in big demand.

Chartered accounting. Nothing much has changed from last survey. Excellent staff still in high demand, both in NZ and more particularly in Australia and UK. Exporting clients really hurting with NZD as all forward cover is unwound. This is having a detrimental effect on bottom lines. Our business is very busy, but there are some fee pressures being felt, which means we will struggle to pass on the increased cost of employing good staff which will result in a contraction in our incomes.

Still busy and not expecting any change in activity. Clients are still busy and my advice to them is to ignore newspapers and the like and get on with the business

Agriculture
Pastoral farming - suprisingly resilient
Sheep & Beef, Commodities prices holding well with even upside predicted in beef. Foot and mouth scare not taken seriously enough by government; Would destroy economy.

Dairying, Talk of extra 20c for this year is good, more uncertainty for next year. Less said about FMD the better.

Sheep and Beef. Continuing strength of Dollar a concern, as are Wage claims over 3% and the resulting flow on of increased charges as suppliers seek to recover costs. Unfortunately we dont have that option!
Dairy industry: good for the next 6 months, bad after that - 15mth lag on the exchange rate and prices will come down.

Dairy farming: The outlook is promising. World demand for dairy products increasingly exceeds supply. Payout in the coming season is likely to be tight, because of rhe run-out of forward currency hedging, but the longer term picture is encouraging.

Sheep and beef farming, looking OK.

The Kiwiwfruit industry continues to be effected by the high NZ dollar.

Aviation
Tight due to high oil prices and overseas competition. (Airline)

Boat Manufacturing
Very tight, the dollar is affecting offshore sales and making imports cheeper, but we are not seeing reduction in imported goods used for construction.

Business Consulting
SME wholesalers supplying products to retailers are slowing down quickly, while service provider sales are holding up much better.

Business Advisory: relatively static, with a shift from property-owners waking up to increased IRD audit activity over past property transactions, which really are not a concern in this practice. Anecdotally, some practitioners appear exposed to aggressive tax stances taken up by their clients, which on audit exposure are probably regretted by all realising the effective outcome differences between IRD’s various relevant criteria on tax disputable stances. The 2003-04 tax year appeared notable for property transactions which are likely to haunt some clients & practitioners through the following 3 years. 2004/5 & + years should surely be quieter with reduced exposure for a selection of property investors, and plateau practitioner incomes as a consequence.

Business Management Software.

At this point in time the market is still bullish. Sales at record highs.

Very positive - software and services for SME market

Chemical Industry
Is down on last year.

Cleaning
No extra casual work now, jus normal contract work. Business’s are looking at every extra cost and deferring jobs which only 3 months ago would have been done without thought.

Computer Sales and Service
Difficult costs increasing (wages, fuel etc), hard to increase charges.

Construction
Very difficult to get builders and sub contractors.

Building:still rosey
Commercial construction: solid demand, being selective; resources jus OK.

Residential Construction - market remains strong in entry level homes, our speciality. Expecting to see the budget contain assistance for first home buyers.

Construction and Property Development. Still looking positive with good inquiry levels. Land sales still strong for owner occupier market. Rental levels looking to increase due to increase in construction costs and land values. Firm yields holding market in positive we think, and if they were to soften market would slow up. Labour shortages for sub trades has eased due some apartment projects being put on hold.

Slowing in the residential end of market, no change in commercial. Competition as always very severe. Industry is building related.

Construction - Very strong but may be plateauing.

Land development / Surveying, Wellington region, extremely busy, no sign of slowdown, in fact our biggest problem is satisfying demand and getting qualified staff.

Education
We are noticing more enrolments from first time students (who may be mature students as well as school leavers) but less from returning students which may reflect the tight job market. i.e. people feel less inclined to upskill because they don’t feel the pressure of market forces. This is despite the recent (small) rise in unemployment announced today.

Education. Student numbers holding. Government funding rolling over though not growing.

Electricity
Retail prices have been rising in the electicity industry over the last two years without resulting in any significant new investment in generation. Recently hydro levels have also started to fall below long term averages lake levels, indicating there is a possibility of more expensive thermal generation over the comming winter with associated high power price spikes before the election. Watch this space.

Engineering Supplies
Steady to improving over last two months . Results may be localised

Engine reconditioning
Patchy this year and not as strong as 2004. signs that individuals may be reducing their spending in response to quieter times ahead .

Farm Bike Sales & Service
Slowed down with the foot and mouth scare.

Finance
Enquiry has noticeably dropped off over the last two weeks and brokers commenting on a change of "pace". Small 1st & 2nd mortgage finance company

Flooring
Primarily residential, secondary contract residential & small commercial. May 2005 is our biggest month ever, looks to continue for the next couple of months. Still lots of "good quality home" house plans being brought in by residential clients. We think the economy will stay the same for us because it cannot get any better ! - still restrained by installation labour resource.

Forestry
Very gloomy, government actions and RMA have depressed this industry.

Forestry is a dog at present high $ plus downward pressure on prises in NZ due to over supply.

Forestry/Timber. As depressed as I’ve seen it in 20 years. High international transport costs and Strong $NZ has made profitability marginal for all players right through the supply chain. If it wasn’t for the strong construction in Australasia in the last 3 years the industry would be a basket case, but this is now slowing and the Kiwi/Aussie cross is compounding the profitability. Contractor redundancies, sawmill closures and harvest reduction have been rife. We are at about 6 on a standing 8 count. Only a reduction in the $NZ will prevent a KO.

Fresh Produce Exporters
Business very quiet

Hire
Improving - equipment hire.

Horse education industry
Very positive even though the racing portion is discriminated against by the government and also dis-organised internally.

Hospitality
Anticipated recovery is slower than expected and appears to be affecting many similar establishments around us.

IT Industry
Looking healthy at this stage.

Starting to slow down - IT contract.

High exchange rate continues to make exporting more challenging and less profitable - Software services.

IT Software - no change apparent over the last few weeks, as busy as ever. We are well aware of the 30 June cycle which in our sector can push a lot of $20k - $100K spending as customers use allocated budgets before a financial year end. So the real test of resilience will be the Sept quarter.

IT services look to be picking up in our target market due to a number of factors including regulatory change and supressed activity in recent years

Kitchen Industry
Sales are picking up at present. …Appears to have been a slower start to the beginning of the year than this time last year.

Legal
As a lawyer we are very busy.However clients report they are having some trouble in getting the price they want for their houses, but there are still plenty of contracts coming through.

Law firm - really busy, the work just keeps flowing through the door, difficult finding senior lawyers.

Legal: Things may be slowing down ahead of the election. Disgruntlement at percieved high tax rates and compliance costs.

Legal - although there is still plenty of work coming in there are not the same quantity of commercial deals as there were and clients are approaching these with some caution. The number of residential conveyancing transactions has eased although there is no significant sign of a reduction in prices.

Solicitors. We do not have a downturn but anecdotal evidence suggests that it is being felt in some sectors.

Manufacturing
Increasing local costs, combined with severe import competition making survival difficult. It may be best for us to close our factory and move it to China as this seeems to be what Govt., policy is pushing us to do.

Manufacturing is very challenging with pricing being the key issue due to the Chinese threat. We need to employ the best processes and practises to compete.

If this dollar doesn’t drop soon we will need to move manufacturing off shore. There is no advantage to manufacturing in New Zealand oversea, when exporting most of your production. The dollar used to offer a wage cost advantage that offset the higher freight costs.

Manufacturing The exchange rate is still a challenge but the opportunities are immense.

Manufacturing for building industry - still the same as last year. The investment in tooling & machinery has paid off for us and we will continue to grow.

Am in the furniture industry as supplier and exeriencing healthy sales though margins are being squeezed by increased costs and retailers being unhappy to accept higher prices.

Manufacturing for residential construction. Things are progressing at a steady pace.We are seeing a flattening out in prices and a little sharper competition in the market place.

Busy for at least the next 12 months and the forseeable. Main issue is not sales but the rising tide of costs.

Industrial Label Manufacture - Volumes still holding including exporters.

Market Research
Demand continues to be solid driven by Government, SOE and related organisations investments (election year a factor?). The comemrcial sector continues to be tight driven by multinationals managing their investments carefully in the small (by global standards) NZ market.

Metals fabrication industry
Now seeing the beginnings of a tightening of capital plant expenditure with projects being delayed.

Mortgage Brokering
More people are searching for a choice in their options. Becoming wiser.

Plumbing Industry
Major shortage in skilled plumbing staff, we are seeing less gasfitters with current licences due to regularity requirements.

Printing
Somewhat quiter than expected.

Expecting a drop leading up to elections and recovery late in year to hold about the same as current.

Private Hospital Sector
The impact of the Nurses wage & salary increases in the public sector is flowing through to the private sector and will have significant impact on prices. Nursing costs are significant in the sector and the 20 - 30% pay increases for nusrses will add 10% to private hospital prices.

Private Surgical Hospital - continuing prospects for modest growth

Public infrastructure - building and construction
Resource constrained - there are insufficient people to specify, design, manage and construct the many infrastructure projects either started or planned.

Real Estate - Commercial
Commercial Property investor-Market is hot, with lots of activity. I like the look of some of the quality developments in Auckland, particularly Mt Wellington and Botany.

Provincial Property Valuation Practice. An active market (rural/residential and commercial) generating an overabundance of work. Graduates have been hard to come by however there now appears more acceptance of the provinces as a place to work. Insurance (PI) and fuel cost increases are impeding margins.

Ive just heard of a small commercial property in Dunedin with little, if any, rent growth potential, selling for a 4.5% return!1987 all over again.

We have found it difficult to get a new commercial property syndicate accepted in the market.
Commercial Real Estate. Still a demand but clients being very particular & taking time to make a decision if leasing. Investment properties still sought after if well leased. Still an average level of enquiry for businesses but clients are cautious. Personally don’t like the border vunerability demonstrated with the F & M scare. NZ can lose credibility with overseas clients.

Real Estate – Residential
A huge slow down in requests for Residential Valuation work.

Mixed views at the moment, properties priced right are selling well, vendors with high expectations are just sitting waiting for the buyer at the higher level. More properties on the market, not such a rush to buy with multiple offers.

House prices rising, but numbers selling slowing.

Rental accomodation. Have an extended vacancy for the first time in 5 years and the manager advises that demand has definitely dropped (and by implication I can expect more!). However, in looking to purchase another property to make the most of the apparent decline, I find yields are usually marginal and in some cases pathetically low. Are these vendors gold digging as the yields and the trends certainly do not support their aspirations?
Property investment - vendor expectations still un realistic and trying to cash in on "boom". Not going to happen.

Residential Real Estate - Central Auckland - April number of sales in my suburb down 67% on March number of sales. Prices steady but less activity over $1 million. Days to sell obviously increasing.

Property Investor-The Rotorua market is still strong. I was handed a rent apprasial by an agent when looking at a house with a range of 200 to 230. $210 is max on that street (was $180 6 months ago) so I think inflated rent apprasials for the out of town investors pouring in.

Residential rental market - Slight softening of demand generally.

Numbers selling declining but prices contuining to hold. Some mortagee sales being advertised.

Real Estate - the number of properties available has decreased since last month. There are still plenty of buyers who appreciate well priced properties and will buy them. There is less urgency from sellers to take advantage of this good buying market. Price expectations still requirying some adjustment by those selling.

We are in the property advisory business in Auckland and there are clear indications that things are slowing and possibly quite rapidly. Instructions are falling in number and developer clients are saying that they are again being pursued by agents again, rather than the other way round, as has been the case in the past. The top of the cycle seems to have benn reached at last. This is notwithstanding thinking that very thing a year ago, although it did not happen.

Valuation. Property market in hamilton remains steady, minimum growth at its worst. shortages of listings for residential and especially lifestyle continues to keep prices paid up. Tender and Auction situations very fashionable.

Real Estate sales are definitely slowing in this part of NZ with a lot of our listings over priced and vendor expectations too high.

(Residential property investment) Property yields in regional New Zealand are rising due to rising rents. This will continue as it is presently far cheaper to rent than buy a house in most areas.

Independent Residential Property Management in Nelson: With the unusually warm autumn it was a surprise to realise the winter market has sprung onto us. I let 20 properties in February, 19 in March, 7 in April and so far 1 in May. Despite this we still have only three vacancies looming in a week.

Housing market in Whangarei, - one property sold for $242k in 1999, $260k in 2001, $300k in 2002 and $425 recently. Another sold for $380k 9-04 and is about to sell again for $430k. Big jumps in the last 6 months perhaps driven by the time lag and expense involved in building new.

Real estate(residential).Open homes very quiet;buyers believe they can hold back take time to decide and believe vendors will accept lower price levels.

Realtor on North Shore, AkProperty over $450,000 is taking longer to sell and prices that have been over inflated are backing off 3-5%.Lower priced homes in strong demand with first home buyers and a significant number of Australian investors buying firmly and predictions of strong demand over the next 5yrs based on Labour promises of strong imigration figures temporarilly on hold to keep Winston quiet.Strongly confident in the future here with the exception of the month before the election.No sign of a drop in sales in the foreseeable future despite media fears which have predicted gloom and doom for 4years straight.

Residential Real Estate.As an Auctioner working in Auckland’s central suburbs I have witnessed no shortages of buyers competing for property in varying price ranges. On the other hand though, some vendors bullish expectations are stopping sales at very healthy levels. Perhaps they know something that I don’t - to me it seems like a market to be realistic within as buyers are certainly more "precious" than they were a year ago!

Research & Development
Chemical R&D- finding we can raise USD prices in main export market with little resistance. Continuing solid order book and again considering new hiring.

Retail
(Negatively affected by)… The flow-on effect of housing, construction and the dollar.

Steady foot sales but phone enquiries have slowed down during the past two months.

Retail very flat in Auckland. Big ticket items in home improvement have noticeably fallen off.

Manufacturer/Distributor to retail - quieter at the moment.

Fuel retail/convenience. trading strongly but staffing is a real issue.

Retail Property Valuations. Slowing - although not unseasonally quiet.

Furniture retail in Auckland has been slower over the last 6 weeks compared to last year:slight pickup last week but future looks slowish because of easing property market.

Retail - things have slowed somewhat over the past month & I’m concerned with rising wage rates & the possiblity of interest rates going up in the future.

Sawmilling
Housing starts down, export disaster.

Sawmilling industry conditions difficult, especially for export focused mills. Expect more industry attrition.

Seafood
High dollar means exports are a lot tougher with hedging only good for so long.

Lobster prices fell sharply for a couple of days earlier in the week but recovered the lost ground later in the week. Indications are that the market, particularly in China, is very unstable at the moment and more of these fluctuations are very likely in the next month or so. In the finfishery, the Top of the South buyers are looking hard at the markets and the prices that they can afford to pay fishermen for product,with a view to increasing prices to help relieve the present financial difficulties for finfishermen in the Nelson/Marlborough region.

Sheep skin processing
Into export pelts for leather garments and slipe wool. Pelts are dropping in price further on the back of poor demand for leather garments - Leather clothing is out of fashion. Pelt tanners have very few orders for leather and so are slow to open LC’s. There is a sizeable amount of stock held by NZ companies under agreement but for which LC’s are being very delayed or ultimately cancelled. Wool sales moving quite well, prices not great.

Technology consulting
Looking very positive for next 6 months with reasonable level of business and billable hours expected.

Telemarketing/Sales
Buoyant but clients being more cost conscience and not as bullish about growth for next 12 months.

Tourism
Worse
Tourism accommodation – luxury end. Demands seems to be slowing with fewer enquiries for 2005/2006 summer. Usually have higher bookings at this time of year.

Tourism stays remarkably even: autumn is better than last year.

In the accommodation industry, we tipped the balance for the first time with more than 50% of guests being from off-shore. Full occupancy has extended from Summer right through to end of May for the first time.

Seasonal slowdown, Queenstown very slow until snow arrives,chch is always quiet this time of year unless you are a rugby pub

Transport
Fuel price cost is 40% higher than comparatve period (9 months). Increasing prices is difficult. Have been raising prices regularily and maintaining margin. Getting the price increase accepted is a new skill we have had to learn but it means our bottom line is holding. We are better businesmen now in a higher cost input because we understand the impact to us of the higher input prices. Either the customer pays or we work for less. We prefer to continue to be better businessmen by dealing with the issues now. "Its not race to the bottom" so price increases are necessary.

Transport- shortage of trained staff predicted 4 years ago is now a reality. Extremely difficult to source and retain skilled staff in major centres.

Used cars
Canterbury. More stock than buyers.

Motor vehicle retail bottom end of the market. Consistent with last year but probably no growth this year.

The BNZ Confidence Survey is run fortnightly. In every second Weekly Overview email sent to the 7,500 non-BNZ email addresses on our database respondents are asked to click on a URL which takes them to a survey site. Respondents are asked if they feel the economy will get Better, Worse or stay the Same over the next 12 months. Respondents may also make comments if they wish. Results are collated each Tuesday and released that night in this publication to media and WO readers.

This publication has been provided for general information only. Although every effort has been made to ensure this publication is accurate the contents should not be relied upon or used as a basis for entering into any products described in this publication. BNZ strongly recommends that readers seek independent legal/financial advice prior to acting in relation to any of the matters discussed in this publication. Neither the Bank of New Zealand nor any person involved in this publication accepts any liability for any loss or damage whatsoever that may directly or indirectly result from any advice, opinion, information, representation or omission, whether negligent or otherwise, contained in this publication.

ENDS

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