last updated 26/11/2020
Good news, but lower unemployment and immigration a challenge for franchise recruitment
last updated 26/11/2020
24 November 2020 - The latest issue of Westpac’s Quarterly Economic Overview explains why the economy is where it is, and looks at the implications of Covid-19, local and global economic expectations, and forecasts for the future. How will franchising be affected?
Starting with the good news: New Zealand’s economy has shown its resilience in fine style, says Dominick Stephens, Westpac’s Chief Economist. ‘It’s now clear that the economy will be damaged, but not as severely as originally feared. We predict a peak unemployment rate of 6.2%, which is about the same as the 2009 recession.’
Tourism exports normally account for around 5% of GDP, and the halt on tourist inflows since March has been a significant drag on earnings and employment in sectors like accommodation and hospitality. However, as the latest issue of Westpac's Quarterly Economic Overview notes, ‘In contrast, outside of the travel and tourism sectors, much of the ground lost earlier in the year has already been recovered, with many parts of the domestic economy rebounding faster than expected after the lockdown. At the head of the pack, businesses linked to the building industry are reporting strong demand. We’ve also seen lifts in manufacturing activity (including exports) and gains in the retail sector.’
‘Against this backdrop, we’re now seeing a rise in the number of businesses who are planning to take on new staff. Underpinning this resilience in domestic activity has been New Zealand’s success in curbing the spread of Covid-19. That’s meant most restrictions on activity have been lifted sooner than anticipated and has left New Zealand sitting in a much better position than many other countries.’
The Overview adds that, ‘On top of that, a massive amount of monetary and fiscal stimulus has been rolled out since the start of the year. That’s given demand in some key parts of the economy (including the housing market) a powerful shot in the arm.’
Dominick Stephens comments, ‘House prices are skyrocketing, and we think this is just the beginning. By mid-2021 we expect house price inflation will be 15%, roughly the same as 2016.’ And he warns, ‘The political and social fallout will be just as intense as it was back then.’
Tax more or spend less?
Although Government deficits are mounting, the better-than-expected performance of the New Zealand economy means that the tax take is going to outstrip Treasury’s pessimistic forecasts. Dominick Stephens suggests that, ‘Windfall revenue will be allocated on a “two for debt, one for social spending” basis, allowing positive fiscal surprises and more spending. However, this fiscal trajectory is unsustainable, so future governments will have to tax more and/or spend less.’
The Overview explains, ‘Given the lingering challenges stemming from the Covid outbreak and the current Government’s spending priorities, we doubt that there will be significant moves on either of those fronts during the current parliamentary term. Indeed, although the Government has announced plans to lift the top income tax rate, the resulting increases in tax revenue will actually be very small.
‘The required adjustments to our fiscal position can’t be delayed forever. Sooner or later, some form of consolidation will be necessary, though the precise form this takes will depend on which party is leading the government at the time. Our pick is that a future government will introduce some form of tax on assets, such as a land tax, capital gains tax or a wealth tax. Societal concern about increasing wealth inequality is only going to intensify, eventually creating a large constituency for such a tax. And tax experts agree that broadening the tax base would enhance economic efficiency.’
At the recent Westpac Franchise Summit, there was a lot of talk about the difficulty or otherwise of finding new franchisees. Franchisors have been reporting widely-differing experiences (depending on the industry within which they operate), but some were surprised to find that the expected increase in interest has not turned into new appointments.
The lower than expected unemployment rate is one potential reason for this (although there may be more redundancies to come), but another is the reduced population growth, as the Overview points out.
‘Although the start of 2020 did see large numbers of New Zealanders returning home as Covid spread around the globe, that story is now a thing of the past. In fact, the number of New Zealand citizens and residents returning home each month has fallen to around half of normal levels.
‘At the same time, the closure of our borders has meant that the flow of new foreign citizens arriving in the country has also dried up. These developments mean that population growth is set to slow from rates of around 2% in recent years to just 0.5% over 2021.’
As well as the impact on franchise sales, ‘Lower population growth will mean slower growth in the demand base for industries like retail and hospitality. The lack of migration in or out of New Zealand could leave the country with the wrong mix of skills, which will be detrimental to productivity.’
It does mean that, as has been the case for several years, good potential franchisees will be in high demand.
Read the full report
The Overview covers the New Zealand economy; the global economy; Inflation and the RBNZ; agricultural outlook; exchange rates; a special report on which New Zealand exports are most exposed to China; and economic and financial forecasts.
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