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The latest NZIER Quarterly Survey of Business Opinion (QSBO) showed that businesses across New Zealand are feeling more confident about the New Zealand economy, despite a sombre start to the year. A net 18% of firms expect the NZ economy to improve over the rest of 2016. Importantly, a net 19% of firms are feeling optimistic about their domestic trading activity (DTA), up from a net 6% in March. The DTA measure provides a good forward indicator of NZ’s GDP growth over the coming three to six months and suggests that the economy will be growing by 3% by the end of 2016, up slightly from the current pace of 2.8% over the year to March 2016. It is worth noting that these results were mostly taken before the Brexit vote results were known, although we don’t expect this to have a significant impact on local businesses in NZ as a whole.
While all business sectors surveyed were feeling more upbeat about their outlook (NZIER doesn’t explicitly survey agricultural firms), the construction sector was a clear standout. A net 36% of building firms expect to see an increase in new orders over the coming quarter, driven largely by domestic demand, compared with a historical average of -2%. Building firms also suggest that they are struggling to hire enough skilled workers to keep up with demand for building services.
One of the major drivers of economic growth over the past year has been from the service sector, and these companies are also feeling increasingly optimistic. A net 26% expecting to see the volume of services increase, reversing some initial concerns about slowing customer demand at the start of this year. Services firms are also expecting to see margins start to widen, with cost pressures remaining relatively subdued.
The fact that businesses in New Zealand are feeling more confident is a positive indicator of demand in the economy as a whole. It means companies are more likely to invest (which can positively impact other firms) and also more likely to hire additional staff (which can in turn boost consumption spending). The latest survey suggests a net 13% of companies anticipate hiring new staff in the next three months – which suggests employment growth in NZ should pick up from its current pace of 2% yoy. Outside of the dairy sector the outlook for New Zealand firms looks positive and signals that the NZ economy should continue to expand at a solid pace, giving businesses opportunities to grow.
Several weeks have passed by since UK voters surprised global financial markets and chose to leave the European Union (EU), and focus has switched to what the decision means for the global economy. While the shape of Britain’s future relationship with the EU remains unknown, it is difficult to forecast the full impact of Brexit for the UK, the EU and the global economy. The country’s Conservative Government has elected a new Prime Minister, Teresa May, who has appointed a new look Cabinet to meet the challenge of an orderly Brexit. Mrs May’s Government has yet to enact Article 50 of the Lisbon treaty – which sets out the process of withdrawal from the EU – and there are suggestions that Article 50 will not be triggered before the end of 2016.
In the meantime, we have started to see the first signs of the fallout from the decision on the UK economy. Fortunately, for now, the fallout seems isolated to the UK. Forward indicators for the UK services industry suggest that the sector slowed sharply in July, with the Markit services Purchasing Managers Index (PMI) declining to 47.4 from 52.3 pre-Brexit (a PMI reading below 50 indicates that activity in the sector is contracting). On the other hand, the same measure from the UK’s largest trading partner, the EU, managed to hold up above 50 in July. Almost all forecasters are expecting the UK economy to enter a period of economic slowdown, with the risk that the UK will enter a technical recession (i.e. at least two quarters of contracting GDP) in the coming year if investment and business confidence remain low.
Of interest for businesses here is what does a UK slowdown imply for the global economy and New Zealand? Fortunately the UK’s direct influence on the global economy, and New Zealand, is limited. Britain accounts for less than 4% of global GDP, and for New Zealand the UK makes up only around 5% of New Zealand’s total exports (and only 3% of NZ’s merchandise exports). However, the financial market volatility and the precedent that Brexit sets for other countries looking to leave the EU are the more immediate concerns. The vote has raised the serious question of who could be the next country to leave the union – frontrunners include France and Greece. A wider breakdown in the EU could cause greater problems over the medium-term.
Despite the risks, Brexit does create future opportunities for New Zealand. The UK is a large net importer of food in order to feed its growing population of 64 million, and NZ is well placed to assist in this regard. If future trade arrangements with the EU come attached with restrictions (e.g. tariffs and quotas) then the UK is likely to seek out other trading opportunities. In recent weeks the UK has held trade talks with India, and it is likely that similar talks will occur with other traditional trading partners, such as New Zealand, in the coming years.
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