The latest New Zealand Equipment Demand Index has shown that thanks to the growing economy, 46 per cent of local kiwi businesses are looking to increase their capex over the next 12 months.
Capital Investment Expected to Top NZD$60 billion
Over fifty per cent of New Zealand businesses say positive confidence in the domestic economy is driving their decisions on capital expenditure, resulting in 46.0 per cent of planning to increase capex in the next 12 months, according to the latest Alleasing Equipment Demand Index (the Index).
Of this 46.0 per cent, businesses who are looking to expand their asset base are doing this by an average of 17.0 per cent, compared to 10.8 per cent which plan to decrease their capex, by an average of 7.5 per cent. The remaining 43.2 per cent of businesses plan to leave their capex unchanged.
This quarter, upper corporate businesses were the most bullish, with 48.6 per cent planning to increase assets, which was closely followed by SMEs at 47.4 per cent. For past two Index reports, lower corporates remain the least positive, with 44.3 per cent planning asset increases.
With an increasing population and steady growth across the county, New Zealand’s economy is thriving, generating an increase in business confidence. Over fifty per cent (51.2 per cent) of businesses stated that the positive movements in the domestic economy, which is expected to continue into 2018, influenced their capex decisions. In addition to this, 36.0 per cent said their businesses were “in expansion mode.” Findings from the Index have suggested that business capital expenditure will reach NZD$60.7 billion this year, a record for the country.
Only 8.0 per cent said they were “in contraction mode” while 4.8 per cent said their capex decisions were driven by a “lack of confidence” in the economy. This lack of confidence in the economy could be a result of the decline in oil and dairy prices earlier in March, however, pricing in these industries has been known to fluctuate over recent years.
“It is well known that New Zealand punches above its weight on the sporting field and now the country’s economy has developed into this decade’s world beater,” states Daniel Blizzard, chief executive of Alleasing.
“With an increasing population driving demand and bringing in new skills, New Zealand’s 4.7 million population has been growing by one person every three minutes and 37 seconds.
“Put that with an increasingly open and competitive economy it is little wonder that the economy is on an upswing, with growth forecast to increase from 2.9 per cent to 3.2 per cent in 2018.”
As positive as the influx of new skills has been from immigration, this will likely change when New Zealand go to a general election next year. The National Party Government has already announced changes to immigration regulations, with a “Kiwi First” approach clarifying the definition of skilled migration and limiting visas to lower skilled workers from five years to three.
The measures are designed to slow the rapid pace of immigration, which although creating a bigger market, could put a strain on business capacity and on governmental services and infrastructure.
As demonstrated in the Index, businesses have been used to adding assets and boosting capital expenditure to increase capacity in a bid to take advantage of the growing market despite limitations on capital availability.
When describing the impact of their capital expenditure decisions, 38.4 per cent of respondents said it would “help improve our competitive positioning.” A further 32.9 per cent said the capex decisions would enable their business to “pursue expansion plans,” and 8.0 per cent said they would “tread water in 2017/8”. A total of 4.8 per cent, the exact same percentage of those who lacked confidence in the economy, responding that projects would be “put on hold.”
Regarding asset acquisition intentions, 46.8 per cent said they planned to increase assets this quarter, down from 52.1 per cent in the previous March quarter.
“The question arises as to whether this slight decrease was driven by the ‘End of Financial Year’ effect in the previous quarter, or if there has been tapering off in sentiment,” said Alleasing’s Daniel Blizzard.
“Businesses which were planning increases in the March quarter, said the average increase would be 9.3 per cent, but this has also fallen to 8.9 per cent this round.”
“There is the promise of growth and capital expenditure is heading for a record, but it remains to be seen if New Zealand has the balance right between expanding its capacity or over-reaching itself in expectation of ongoing growth which may become problematic.”
With a general election on the horizon and new tighter immigration laws cooling the population influx, this could dampen business sentiment, however should businesses strike a balance between capacity and expenditure, New Zealand’s economy can expect to blossom.
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NB. The research and publication of the Equipment Demand Index was conducted under Maia Financial’s previous name, Alleasing.
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Equipment Demand Index is a quarterly report which interviews circa 250 New Zealand businesses turning over between $5 million and $250 million per year.
Alleasing is a leading, independent provider of capital solutions. Established more than 25 years ago, we have financed billions of dollars’ worth of assets, supporting the capital needs of government entitles and corporations across Australia and New Zealand.