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Economic analysis for Auckland

December 2008 | July 2008 | March 2008 | December 2007

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March 2008

Auckland's economy plays the blues

Auckland city's economic conditions have tightened fast in the first quarter of 2008.

The Economic Development group of Auckland City Council takes an annual retrospective of the economy for the 12 months ending March 2008. The full retrospective on Auckland's economy will be available on this website in early August. Meantime - here is a synopsis of our findings.

"Feel good" turns

Aucklanders feel best when house prices are high, immigration is fuelling demand, and houses are selling quickly. Little wonder, then, that a gloom has settled over consumers. Conditions have definitely changed.
 

Demon inflation

Inflation was up 3.4 per cent in the year to March 2008. The governor of the Reserve Bank, Alan Bollard, predicted in June that this figure would increase to 4.7 per cent for the rest of 2008. Both figures are outside the Reserve Bank's legislated target (1-3 per cent). Food (especially groceries), fuel prices and housing have been key culprits in the year to March 2008 (Table 1).

Table 1: New Zealand inflation indicators

Consumers Price Index (quarterly)
	March 07	March 08	Per cent increase
All groups	1010	1044	3.4
Food group	1036	1089	5.1
Transport group	947	1013	7.0
Typical price of....(monthly)
	March 07	March 08	Per cent increase
10 litres of 91 octane petrol	$14.23	$17.16	20.6
A 1 kilo block of cheese	$6.46	$10.69	65.5
1 loaf of white, sliced bread	$1.20	$1.38	15.0
2 litres of standard milk	$2.61	$3.25	24.5

Source: Statistics New Zealand

New Zealand's interest rates are currently the highest in the Asia Pacific region and the Official Cash Rate (OCR) has been at 8.25 per cent since July 2007 (Australia's is currently 7.25 per cent). The effect is circular. High interest rates attract foreign capital, fuelling an increase in the value of the dollar, and straining exports.
 

Housing and building impact

Despite a static OCR since the middle of 2007, mortgage interest rates have continued to climb into the first quarter of 2008, fuelled in part by the international "credit crunch". High interest rates and slowing net migration [1] mean that demand for new and existing houses has fallen. House price inflation has eased, houses are taking longer to sell, and sales volume has decreased in Auckland city. In March 2008, the city's median house sale price ($510,000) was still above that of the region ($437,500) and New Zealand ($349,000), but only 0.5 per cent higher than it had been 12 months previously (Table 2).

Table 2: Auckland city housing indicators

	March 07	March 08	Per cent increase
Number of house sales (quarterly)	2,966	1,594	-46.3
Average number of days to sell a house	27	34	25.9
Median house price (monthly)	$507,500	$510,000	0.5
Growth in median house price (annual)	23.8 per cent	0.5 per cent	na

Source: REINZ

Demand for new houses in Auckland city in the year to March 2008 (as measured through the issuing of new residential building consents) has increased 8.1 per cent over the year to March 2007, with a total of 1,864 new residential consents issued. However, the level of new residential consents over the last two years matches the lowest level in the past ten years (as at March 2001). The most recent peak in new residential consents occurred in the year to December 2004 at 5,622.

The value of non-residential consents (new buildings plus alterations of existing buildings) dropped by 15 per cent in the year to March 2008 to $499.63 million. This was predominantly due to a dramatic drop in the value of consents for new buildings (by 25.4 per cent) most of which occurred in the last three quarters of 2007 (Figure 1).

Overall, the average value of non-residential building consents has decreased since 2005, driven by a decrease in the average value of consents for new buildings. The average value of consents for alterations to existing buildings has remained relatively stable during this period.

Figure 1: Value of non-residential building activity in Auckland city

Source: Statistics New Zealand

How blue are we?

Consumers have shut their wallets (particularly in the last two quarters to March 2008) and businesses are glum. The general building investment outlook has declined since June 2007. Business opinion in March 2008 has declined to its lowest ebb since June 1994 among businesses in Auckland city, with a net 67 per cent saying the general business situation has deteriorated in the last 3 months (Figure 2). Businesses face increased borrowing costs, uncertainty in domestic and international economies and pressures on business profitability. Most businesses have experienced rises in average costs since 2003, and in Auckland city (and Auckland region) there has been a decrease in productivity in the corresponding period. It is likely, then, that firms will continue to delay or decrease investment spending at least in the short term.

Figure 2: Auckland city business confidence: general business situation

Source: New Zealand Institute of Economic Research (Quarterly Survey of Business Opinion) - net percentage of respondents is calculated by subtracting the percentage of respondents saying the business situation has deteriorated from the percentage that say it has improved and dividing it by 100 per cent less not applicable respondents.

 

The retail sector, which accounts for 9 per cent of Auckland city's employment, has also been struck by low confidence. Rising food, fuel and housing costs have constrained household spending in other areas of retail. Annual retail growth slowed in Auckland especially in the last two quarters to March 2008 (Figure 3).

Figure 3: Annual average growth in retail sales

This graph shows the annual percentage growth in retail sales in the year to each month in Auckland city, Auckland region and New Zealand.
For example, growth in retail sales in Auckland city over the period March 2007 to March 2008 was 3.6 per cent.

Source: Statistics New Zealand

Working in Auckland

If you are looking for staff, you are more likely to find them now. Labour shortages have improved since 2007 in Auckland city with fewer firms reporting difficulty in finding skilled and unskilled labour in the March 2008 quarter. However, labour shortages still persist with more firms still finding it harder to find labour as compared to finding it easier. There has been a slight rise in the city's unemployment rate to 4.2 per cent for the year end March 2008 (Table 2). This is, however, still well below that experienced in the late 1990s.

Table 3: Auckland city labour market indicators

	March 07	March 08	Difference
Unemployment (annual)	3.8 per cent	4.2 per cent	0.4 per cent
Percentage of firms finding it...(quarterly)
...harder to find skilled labour	41.1 per cent	27.0 per cent	-14.1 per cent
...easier to find skilled labour	1.6 per cent	7.7 per cent	6.1 per cent
...harder to find unskilled labour	28.7 per cent	19.9 per cent	-8.8 per cent
...easier to find unskilled labour	8.7 per cent	6.0 per cent	-2.7 per cent

Source: Statistics New Zealand, NZIER

Interestingly, Auckland's working age population is growing. Those aged 15-64 years grew from 70 per cent of the population in 2001, to 72 per cent in 2006. The ethnic structure of the population has contributed to this. There has been an increase in people of Asian ethnicity (higher proportion of working age people) and a decrease in people of European ethnicity in the city. There is also a greater share of students as well as people relocating for employment, also influencing the 'working age' numbers.
 

Our prediction for Auckland city's outlook for the three months to September 30

• High inflation continues
• Petrol prices, grocery costs and mortgage rates continue to exert a heavy hand on discretionary spending
• Unemployment will have risen again
• House sales volumes will have fallen, and prices will be coming down
• The effect of the long summer drought will be beginning to be felt, constraining the positive flow on from high dairy pay-outs
• Notwithstanding these negative influences, if the New Zealand dollar falls over the next part of the year, there will be a positive effect on Auckland's manufacturers and exporters

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[1] Although net migration has slowed, Auckland city was the only city within the Auckland region with figures to show net migration gain over the year to March 2008. These figures may be anomalous however. International immigrants may tick the box for their destination as Auckland city unaware that they may in fact be heading for another city in Auckland's region.

Published July 2008