EQUIPMENT DEMAND INDEX

Transcription

1 THE ALLEASING EQUIPMENT DEMAND INDEX BUSINESS BIG ON CONFIDENCE APRIL 2O17 NEW ZEALAND

2 AN EXPANDING ECONOMY New Zealand punches above its weight on the sporting field and now the country s economy has developed into this decade s world beater. The results from this quarter s Alleasing Equipment Demand Index (the Index) shows a confident New Zealand business sector investing in its operations and planning for growth. With an increasing population driving demand and bringing in new skills, New Zealand s 4.7 million population is growing by one person every three minutes and 37 seconds, while someone migrates to New Zealand every six minutes and ten seconds. The country s status as one of the world s best performed economies was underlined by the March visit of Chinese Premier Li Keqiang. The announcement that China and New Zealand would jointly establish an up-graded free trade zone with more open trade and investment was another vote of confidence in an economy which, in the last 3O years, has gone from being one of the world s most regulated, to one of the most liberal and competitive. It has also become one of the world s most outward facing economies, with exports accounting for around 3O.O per cent of GDP. The New Zealand economy is on an upswing, with Treasury forecasting that real GDP growth will lift from 2.9 per cent in 2O17 to 3.2 per cent in 2O18. This is despite an expected fall in dairy exports and a resulting impact on the terms of trade. One over-riding theme that can be seen from this quarter s data is growth. This round of results show that more than half of businesses (51.2 per cent) are driven by positive confidence in the domestic economy, while another 36.O per cent went further and said their businesses are in expansion mode. In total, this added up to 87.2 per cent responding positively. The most bullish sectors are in hospitality, agriculture and retail, where nine in ten respondents gave one of the two positive responses. In comparison, SME businesses and upper corporates are more positive than lower corporates in regards to the domestic economy. At a national level, only 4.8 per cent of businesses said their asset acquisition intentions are driven by a lack of confidence in the economy, while 8.O per cent said their businesses are in contraction mode. Business Reasons for Increasing or Decreasing Capex 8.O 4.8 Contraction mode % 36.O 51.2 Expansion mode Page 1 The Alleasing Equipment Demand Index

3 CAPEX. SET FOR A RECORD IN 2O17? As the 2O16/2O17 financial year drew to a close in the first quarter of this year, businesses were planning their capex spending for 2O17/2O18. So, do businesses plan to increase, decrease or keep their capex spend at the same level as 2O16/17? The Index showed that exactly 46.O per cent of businesses plan to increase their capex spend in the next financial year. A slightly lower 43.2 per cent said they would leave it the same, while 1O.8 per cent reported plans to decrease. SMEs were the most bullish on capex plans, with 48.9 per cent planning an increase. This compared with 45.8 per cent of upper corporates and a below average 42.6 per cent of lower corporates. Analysis on a regional basis shows a wide difference in sentiment. Businesses in Auckland are the most positive, with 49.5 per cent reporting plans to increase, followed closely by the Rest of New Zealand at 47.7 per cent. It was a different result in Christchurch, however, where the result was a significantly lower 37.5 per cent, with Wellington reporting 42.O per cent. On a national basis, those businesses planning to increase their capex spend said the level of increase was an average of 17.O per cent, while those forecasting a decrease were planning to spend 7.5 per cent less. According to the most recent data from Statistics New Zealand, New Zealand businesses spent $11.82 billion on plant, machinery and equipment in 2O16, up from $1O.88 billion in 2O15. Looking at these results in context with the data found in the Index suggests that the 2O17 figure will increase to $11.87 billion, a new national record. Expenditure on transport equipment has been stagnant in the past two years, at $5.O7 billion in 2O15 and $5.1 billion in 2O16. The Index results forecast a 2O17 figure of $5.44 billion for this asset class. Across all classes of assets, gross fixed capital formation by all New Zealand businesses reached a record high of $56.8 billion in 2O16, the most recent data the national agency has available. This was up from $53.9 billion in the 2O15 financial year. The 2O16 figure represented an average annual increase of 5.9 per cent over the two years, and continues a trend which began when the economy commenced its recovery from the Global Financial Crisis in 2O11. Using $56.8 billion for 2O16, the Index capex responses suggests the 2O17 figure to be $6O.7 billion, a year on year increase of 7.O per cent. If accurate, this forecast would result in gross capital formation moving through the $6O billion barrier for the first time, and marking a new national record. Businesses by Region Looking to Increase Their Asset Base 50 % Rest of New Zealand Wellington Christchurch Auckland 10 0 Page 2 The Alleasing Equipment Demand Index

4 GROWTH CHANGES GEAR Data from the previous survey showed that 51.2 per cent of businesses planned to increase their asset base during the March 2O17 quarter (the last three months of the financial year). While the latest results (which examine expectations for the June 2O17 quarter) found that although asset acquisition intentions are still high, they have dipped under the 5O.O per cent level. A fall of 3.2 per cent quarter-on-quarter has left 46.8 per cent of businesses planning an increase in their asset base this quarter. Businesses that indicated they were planning to increase their asset base in the March quarter said the increase would be 9.3 per cent this figure has also fallen, dropping to 8.9 per cent this round. The question arises as to whether this is driven by the End of Financial Year (EOFY) effect or if there has been a tapering off in sentiment, driven by a combination of domestic and international economic factors. Many themes which occurred in the January to March round of the Index have resurfaced this round, showing many businesses following through on their end of financial year plans. As in the last round, upper corporate businesses are again the most bullish, with 48.6 per cent planning to acquire assets, although this is down from 56.9 per cent in the March quarter. Small and medium sized enterprises remain close behind, with 47.4 per cent planning to acquire assets. The lower corporate segment has lagged behind the other two segments in both recent rounds of the Index, with a significantly lower 41.5 per cent reporting acquisition intentions. Of the sectors surveyed, the hospitality industry (accommodation, cafes and hotels) is a clear leader, with around 6O.O per cent of businesses looking to acquire assets. While New Zealand tourism is a major success story for the economy, the sector is lagging behind in providing infrastructure and the Index suggests that significant efforts are being made to catch up. The property and personal services and agriculture sectors reported intentions above the 46.8 per cent national average, while wholesale and construction were both lower at 4O.O per cent. Auckland and the rest of New Zealand continue to deliver the most positive results with 48.4 per cent of businesses looking to acquire assets in Auckland and 49.3 per cent in the rest of New Zealand. This is significantly higher than Christchurch at 4O.6 per cent and Wellington at 41.3 per cent. Asset Acquisition Intentions by Industry % Wholesale Construction Manufacturing Retail Personal Services Agriculture Property Services 0 Hospitality Page 3 The Alleasing Equipment Demand Index

5 SELF-RELIANCE RE-CONSIDERED The Index continues to show the extent to which New Zealand businesses fund themselves and their preference to buy assets outright. Four in ten New Zealand businesses say they will use equity either cash in the business or shareholder funds to acquire assets. New Zealand businesses are renowned for their self-reliance, but there may be signs that this long-held cultural trait may be changing, either because of a shift in mindset or because finance providers are increasing their penetration of the market. The 4O.O per cent result for equity as a funding source is down from the 46.8 per cent recorded in the January quarter, while over the same period finance providers have made up some ground. Between the latest two rounds of research the percentage of businesses saying they will use a finance provider (either a bank or a leasing/finance provider) or a vendor has risen from 27.1 per cent to 29.9 per cent. This demonstrates that an increasing number of businesses understand that equity alone as a funding source has its limitations and are beginning to reach out for other sources of funding. However, there is still a way to go for New Zealand businesses as many have a tendency to buy their assets outright. While this result has held stable over the last two rounds, the percentage of businesses using either finance or operating leases has increased marginally, and now stands at 39.3 per cent. The previous round of the Index showed the potential for financing to unlock capital for New Zealand businesses. According to the Index, New Zealand businesses currently lease or finance an average of 16.O per cent of their asset base. Using the most recent data from Statistics New Zealand on the $8OO billion in non-financial assets held by businesses and applying this 16.O per cent average, there is $672 billion in owned assets more than twice national GDP of $25O billion. Financing only a portion of this would free up significant funds to be used for other purposes by New Zealand businesses. The current Index round showed an increased appetite for financing assets. Future research rounds will continue to track this trend, with time determining whether New Zealand businesses will change their long-standing behaviour or if the intention is only fleeting. Preferred Source for Funds % 20 Vendor Finance Provider Senior Debt Equity 10 0 Page 4 The Alleasing Equipment Demand Index

6 UPWARDS TRAJECTORY New Zealand businesses are in asset acquisition mode and feeling positive the economy is on track for solid growth in 2O17. Not only that, businesses are confident enough to be investing in the future, and the impact of those decisions is likely to drive growth at least in the medium term. The last two rounds of the Index have shown that New Zealand businesses are in acquisition and expansion mode, with a clear majority increasing capital expenditure based on a sense of confidence in the domestic economy. This is a result of an average annual growth rate of 3.5 per cent over the last five years More than 4O.O per cent of businesses surveyed plan to increase their asset base in the next three months, by 8.9 per cent. This result overwhelms the four in one hundred businesses planning to decrease assets. At the same time, more than four in ten businesses are planning an increase in their annual capex budgets, while only one in ten will cut capex. As we have seen, this points to New Zealand businesses spending more than $6O billion on capital formation in 2O17, a figure which would set a new national record. So, what are the caveats? One of the critical issues for New Zealand businesses will be their ability to access the capital they need to grow. The Index continues to show that New Zealand business have the potential to leverage alternate financial solutions to acquire assets, but either there is a reluctance to do so or the solutions are not as accessible as they could be. Either way, this has the potential to put a ceiling on growth. Beyond that, there is New Zealand s national business model, heavily based on the country s clean green image. As the Organisation for Economic Co-operation and Development (OECD) pointed out in its most recent report in March, there is a danger that this business model may have reached its limits, with freshwater pollution and increasing greenhouse gas emissions now posing a risk. In this sense, New Zealand s economy could be a victim of its own success. Globally, there is always the risk of a surprise event such as the 2OO8 Global Financial Crisis, which could over-ride the domestic economic story. Now that Brexit has begun with the UK triggering Article 5O formalising its split from the European Union, this leaves an air of uncertainty across the globe, particularly now that Scotland is on course for a second referendum on Independence. Donald Trump s unpredictable Presidency has sent sharemarkets higher in the US on expectations of corporate tax cuts, but growing domestic political opposition much of it from his own Republican Party has the potential to de-rail his growth agenda. Meanwhile, his foreign policy could stir up tensions between North Korea and Asia s powerhouse, China, which is increasingly important for New Zealand s economic fortunes. New Zealand will be hoping the world can steer a course through these challenges in 2O17, and allow the domestic economy to continue its impressive upwards trajectory. Page 5 The Alleasing Equipment Demand Index

7 ABOUT The Alleasing Equipment Demand Index (the Index) is a quarterly index which examines the current asset inventory of New Zealand businesses, as well as expectations for future investment. The inaugural Index was run during July and August 2O14. The Index comprises research from three segments: SME s turning over NZD$5-$2OM, Lower Corporates turning over NZD$2O-$1OOM, and Upper Corporates turning over NZD$1OO-$25OM. This round of the Index was created from interviews with 25O New Zealand businesses in December 2O16. The Index is executed by Collins Communications on behalf of Alleasing. Alleasing is a leading, independent provider of asset finance and leasing solutions. Established more than 25 years ago, we have financed billions of dollars of assets across a range of sectors, and business sizes. Our focus is on supporting businesses to achieve greater productivity and growth through effective management of their assets, and we are prepared to invest in helping you do this via a residual position in the assets. Our team is driven to deliver solutions that meet your business needs and which provide operational flexibility. This includes the ability to acquire, change or expand your asset base as the need arises. EQUIPMENT DEMAND INDEX DISCLAIMER Whilst this Index has been prepared with all reasonable care and after due inquiry, no representation or warranty (expressed or implied) is provided as to the accuracy, reliability, reasonableness or completeness of the information contained within it. Alleasing cannot guarantee the accuracy of any predictions of future projections. The recipient must make their own independent assessment of the information after making further inquiries. This Index is a guide only. It does not constitute any recommendation on behalf of Alleasing and it is not intended to be advice. To the maximum extent permitted by law, each of Alleasing and all of its related bodies corporate and their representatives, directors, officers, employees, agents and advisors do not accept any responsibility or liability for any loss caused by any action taken by you on the basis of the information or any opinions expressed in this Index. Page 7 The Alleasing Equipment Demand Index

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