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Economic analysis for Auckland

July 2008 | March 2008 | December 2007

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July 2008

Auckland city's economic scoreboard

All values for Auckland city unless specified Year ended (unless specified)
Indicator	June 07		September 07		December 07		March 08		June 08		Time series link
GDP (annual growth)1	1.47%		1.23%		1.17%		1.09%		n/a		See long-term analysis
Unemployment rate (annual average)2	3.9%		4.2%		4.2%		4.2%		4.6%		See long-term analysis
CPI (national rate)3	2%		1.8%		3.2%		3.4%		4%		See long-term analysis
TWI (national quarterly value)3	73.6		68.3		71.6		71.6		68.1		See long-term analysis
Exports from Auckland airport and Auckland seaport (annual growth)2	10.8%		10.8%		11.6%		11.9%		11.9%		See long-term analysis
Retail sales growth (gog)2	5.8%		3.3%		4.6%		0.9%		0.4%		See long-term analysis
Business confidence (net percentage) (quarterly value)4	-32.4%		-24.9%		-22.6%		-67.1%		-63.3%		See long-term analysis
Net migration (annual growth)2	1.0%		-4.9%		-13.3%		-5.9%		-6.9%		See long-term analysis
Number of residential building consents2	1,903		1,981		1,747		1,864		1.815		See long-term analysis
Value of non-residential building consents ($ million)2	$548		$504		$488		$500		$546		See long-term analysis
1 Infometrics 2 Statistics New Zealand 3 Reserve Bank of New Zealand 4 Quarterly Survey of Business Opinion, NZIER *Net percentage is calculated by subtracting the percentage of business saying the business situation has deteriorated from those saying improved in the last three months.

Thunderstorms persist in the Auckland economy

Auckland city has continued to weather more than just weekly thunder storms in the quarter to June, as the economy weakens in the face of a tough international environment. Any thoughts of an economic recovery have been cast aside with the further collapse of finance companies in the United States. Whispers of stagflation continue with fragile GDP growth and high inflation evident in the economy.

Auckland city experienced March GDP growth of just 1.1 per cent (in the year to March) - which has decreased in each of the last four quarters. In fact, March GDP growth was at its lowest rate since 1999. It may be too early to think of a repeat of the early nineties at this stage, but the forecast is generally more grey than blue.

Meanwhile, national inflation has remained high, reaching 4.0 per cent in the year to June 2008. The latest Reserve Bank of New Zealand forecast has inflation peaking at around 5 per cent in the September quarter. These price increases have weighed heavily on the wallets of consumers, with the basic commodities of petrol and food accounting for the bulk of inflation.

On the bright side, more people are opting for public transport, reducing traffic flows across the city. Such rapidly increasing fuel costs have meant the introduction of transport into the emissions trading scheme (ETS) has been delayed as the market has largely fulfilled the role of the ETS.

Auckland city's annual average unemployment rate has also continued to climb, reaching 4.6 per cent in the year to June 2008. Unemployment has consistently risen since a low of 3.1 per cent in the year to March 2006. However, the labour market is still considered very tight when compared to the 1990s (when unemployment peaked in Auckland city at 12.9 per cent in 1992).  

As the gloomy combination of high costs and low consumer spending wears on, businesses remain firmly on the back foot (meaning a plethora of early sales for willing consumers!).  Business confidence in Auckland city is at its lowest level for 10 years, with a net 63.3 per cent of business in June 2008 finding the general business situation had deteriorated from the previous three months.

The economic downturn has meant growth in retail sales continued to head south in the year to June 2008, reaching just 2.3 per cent. With consumer wallets firmly closed, retail has stumbled towards growth of 0.4 per cent between the June 2007 and 2008 quarters. Negative consumer sentiment has also affected a decline in residential building consents (from the previous year). Lowered numbers of consents are also a result of less demand for new houses due to higher interest rates and affordability issues.

The large number of Aucklanders setting sail for sunny Australian shores continues to be a drain on the economy. Although there are more foreigners arriving in Auckland city, an even greater number of people are leaving Auckland city to live overseas.

Auckland city's economic lifeboat has come in the form of the export industry. The value of exports through Auckland International Airport and the Ports of Auckland, is up almost 12 per cent on the previous year to June. High world food prices and a declining exchange rate (led by a strengthening $US) are making our exports more attractive internationally.

Further positive news comes from the value of non-residential building consents, which have risen in the last few quarters. High demand in the office sector for new high quality office buildings has contributed to this growth, while developments for the Rugby World Cup provide a bright outlook in the coming years.

Focus on the official cash rate

From June, the RBNZ has overlooked inflation fears in favour of resuscitating a lacklustre economy by cutting the OCR by 0.25bp and 0.50bp in each of the last two announcements. The OCR currently sits at 7.50 per cent. With the international financial system looking increasingly frail, many economists are expecting an aggressive set of OCR cuts into the future, potentially lowering the rate to 6.75 per cent (or lower) by the end of the year. While this move will increase aggregate demand in the medium term, its short-term effects are less certain.  

The credit crunch

From early 2007, the official cash rate (OCR) underwent a series of rises (see Figure 1), closely mimicked by rises in the floating mortgage rate. The exception to this came between January and June 2008, when the OCR remained constant at 8.25 per cent while the floating rate continued to rise by 0.39 per cent. This reflects the global credit crisis, through which international lending costs have increased dramatically - an important reminder that domestic interest rates can be significantly influenced by the international credit environment. The New Zealand financial system borrows about a third of all funds from overseas. With the recent collapse of Lehman Brothers Ltd and the fire sale of Merrill Lynch - two companies with over 200 years of experience and both survivors of the 1929 Great Depression - we can expect further upward pressure on domestic interest rates, keeping them high despite further OCR cuts.

The credit crunch is further evidenced by the fixed interest rate. The fixed rate has continued to rise (despite perceived future OCR cuts), indicating banks' expectations that international lending costs will remain high in the immediate future. These concerns will only be exacerbated, as the international financial system stumbles along in a wake of bad investments in the American subprime housing market.  

Figure 1: The OCR and average interest rates from New Zealand's main banks

Source: Reserve Bank of New Zealand.

There will also be a lag between OCR cuts and their effect on consumers. Figure 2 shows that the share of clients opting for a fixed interest rate has steadily increased from December 2004 (75 per cent of all clients) to June 2008 (87 per cent). Thus, a larger proportion of individuals must wait for their loans to mature before they are able to take advantage of lower interest rates.

Figure 2: Proportion of individuals with fixed and floating loans

Source: Reserve Bank of New Zealand.

Focus on the housing market

House prices

Double-digit house price inflation seen only a year ago in Auckland city has slowed considerably, to zero per cent in the year to August 2008. Annual house price growth has also dropped in the Auckland metropolitan area as a whole and throughout New Zealand from a peak in the year to January 2008. These are the lowest levels of house price growth for Auckland city seen since the late 1990s when they reached levels as low as -3.4 per cent. However, Auckland city house prices continue to remain above those in the region and New Zealand as a whole.

Figure 3: Annual percentage change in house prices

Source: REINZ Housing Facts.

Sales decline, time to sell increases

The monthly average number of sales in Auckland city has been decreasing since the year to May 2007. Average monthly sales in the year to August 2008 (at 582) are 40.1 per cent below those in the year to May 2007. The number of sales has also dropped in the Auckland metropolitan area and New Zealand as a whole. All three areas are at similar or below sales levels to those of late 2000/early 2001.

Figure 4: Monthly average number of house sales

Source: REINZ Housing Facts.

Despite slower growth in house sale prices, it is taking longer to sell a house in Auckland city. The average of 39 days in the year to August 2008, is well above the 30 days in the year to August 2007. A similar situation has occurred in the Auckland metropolitan area as a whole and New Zealand has risen further to an average median of 45 days to sell.

Figure 5: Annual average median days to sell a house

Source: REINZ Housing Facts.

Further, annual averages in the median days to sell have masked increases that are more recent. In the month of August 2008, it took a median 43 days to sell a house, compared to 29 days in August 2007.

Taking into account house prices, number of sales and length of time to sell, the current slowdown in Auckland city's housing market is moving towards the picture of 2001. If 2001 is used as a benchmark, there is room for further decreases in median prices, while the average number of sales and median days to sell may plateau over the next year. 

Updated October 2008