Bank expects fall in demand for labour

Labour demand will dry up as businesses focus more aggressively on costs in a bid to address lower profits, the ANZ Bank says.

"Investment plans will be the first casualty, followed by discretionary expenditure, but it will not be long before the magnifying glass is put over labour costs - especially with wage inflation set to remain at high levels.

"Once businesses start to focus more aggressively on their labour costs, demand for labour will dry up and the household sector will no longer be insulated from the slowing economy." The bank expected economic growth to be subdued in the coming two years, with consumer spending set to slow markedly.

Momentum was expected to recover from 2008 through an export-led recovery, although a rejuvenated household sector would not join in until 2009.

The June quarter company earnings season had been disappointing with almost 40 per cent of results coming in below expectations.

Costs were being cited as a leading cause of eroding profitability and had the potential to eventually extend into the labour market.

Because of a lack of scope to offset the squeeze in corporate margins through volume growth, the ANZ said, corporate profits had probably fallen in the past few quarters across the economy.

"Of course, the decline needs to be put in perspective, coming off several years of strong profit growth, and earnings are still positive.

"But the key message is that the business sector is bearing the brunt of the economic slowdown through easing growth and higher costs."

The ANZ said that given the economic environment, downward pressure on earnings would be maintained in the coming year.

Transport and storage looked to be the most vulnerable industry sector, with margin contraction compounded by a decline in volumes, poor labour productivity, reasonably high labour costs and a huge reliance on oil.

In contrast, communications, finance and insurance looked well placed as volume growth helped to offset margin declines, stronger productivity growth offset wage inflation. The sector had a low reliance on oil.

In construction, activity may be holding up well and enjoying some degree of pricing power, but the sector was still experiencing a decline in margins.

Businesses generally were better placed to weather the profit decline, having substantially improved their balance sheet and cashflows after a period of strong profit growth, but it would not be long before they started getting more aggressive on prices.

The ANZ said industry consolidation would become more common as a way to manage costs.

- NZPA