Perspectives

Economy turns negative - hold on tight

By Karen Lyons, group manager Economic Development, Auckland City Council

July 2008

Weakness in Auckland city's housing market has spread to retail spending, employment, business and consumer confidence. Add tight credit and the signs indicate tough times ahead for business.

Here's what Donna Purdue, senior economist, Westpac says:

"An ugly run of data in the past few months suggests the economy has experienced a serious crunch so far this year. In particular, housing data suggest the market is in a pronounced downturn, with the Auckland region under immense pressure as house sales slump 60 per cent relative to year ago levels. Moreover, labour market data revealed a sharp decline in employment in the March 2008 quarter, suggesting that one of the key pillars of consumer spending in recent years - job security - is perhaps not 100 per cent bullet proof after all. High and rising oil prices are only adding to the pain with petrol pump prices surpassing $2/litre in New Zealand for the first time in late May."

According to Connal Townsend, CEO of Property Council New Zealand:

"The fundamental demand that underscores commercial property continued pretty strongly up to and including March 2008. Latest figures available for the year ending March, however, still show excellent returns for commercial property of 18.3 per cent, down a little from 19.7 per cent in the previous year - but still well ahead of bonds. Continued demand from tenants and low vacancy numbers, particularly in the high performing CBD office sector, characterised the market. However New Zealand has been feeling the effects of a global credit crunch, and these robust 2007 - early 2008 data will almost certainly have dropped off in the last quarter. Capital returns will reduce, and demand is likely to ease - meaning vacancies will increase."

While right now there may seem little cause for optimism, businesses cycles do come and go. There are positives on the horizon.

Food is in demand at higher prices as never before, and New Zealand knows how to produce it.

Tax cuts are coming in October and infrastructure spending is in catch up. Our transport colleagues tell us there is more infrastructure in planning or underway in Auckland than for years - including the proposed electrification of rail, the Mt Roskill project, the Newmarket Viaduct and Eden Park for example.

A slowing economy will ultimately mean lower interest rates and the Reserve Bank has signalled that it is likely to be in a position to lower official interest rates later this year. In turn the currency can be expected to weaken, improving our export competitiveness, and in fact the NZ dollar has already fallen against the Australian dollar, a key cross rate for Auckland manufacturers.

Bruce Goldsworthy, of the Employers and Manufacturers Association, had this to say:

"The manufacturing sector has spent the last three months very subdued or contracting, as measured by the EMA's performance of manufacturing index. Notwithstanding the challenges, there are also windows of opportunity. Although the Australian economy is beginning to wobble, our dollar is falling in relation to our Trans Tasman neighbours. These exchange rate advantages should translate into a competitive edge for New Zealand exporters in the Australian market. Overall, manufacturers have reported a very quiet New Zealand market and forward orders globally are beginning cool."

Auckland City Council's job is to monitor economic changes in Auckland, and respond to them. We also stimulate positive economic growth over the long term by capitalising on what Auckland does well. This is not a 'quick fix'. However, our city is now of such a size that long term thinking is critical in ensuring we weather economic storms. The recent visit of Professor John Allen, who was sharing his experience on the development of 'science parks', which cluster science based businesses, was a case in point. He said "....the entrepreneurial lifestyle of the population, a city council that is prepared to be innovative, the need for New Zealand to be seen as a world player in the knowledge economy and the presence of a fine and willing university suggests that a science park should be very seriously and urgently pursued."

Published July 2008