Economic analysis for Auckland

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December 2008

Auckland city's economic scoreboard

Focus on the Auckland city economy

The financial crisis has dominated global and national headlines for several months now, and key economic indicators across New Zealand and within Auckland city show the full extent of impacts on kiwi businesses and households.

Starting with the global perspective

The US-originated crisis has spread far and wide as investor panic has consumed share markets across the globe.

As toxic investments of US finance companies and banks were exposed, banks across much of the developed world have had to be more prudent in all lending contracts. As banks collapsed in the United States, share prices plummeted across the world.

The difficulty for businesses to obtain credit has led to restrained investment decisions, and reduced employment. The global increase in unemployment has meant diminished consumer spending, which in turn has created more difficult business conditions as demand has dried up.

This chain of events has created the need for many nations to implement bailout packages, and others such as Iceland and Ireland left wondering if a recovery is ever possible.

Unemployment concerns

Renowned economist John Maynard Keynes once remarked that in order to create jobs in a recession, we should pay people to dig holes in the ground and then pay more people to fill them up. With this comment, Keynes attempted to highlight the importance of keeping people employed during a recession.

While the current economic crisis differs from the Great Depression (where Keynes' ideas were so influential), such unemployment concerns are beginning to arise once more.

The annual average unemployment rate in Auckland city is trending upwards from a low of 3.1 per cent in the year to March 2006, to five per cent in the year to September 2008.

In the last quarter alone a net 1,700 people in Auckland city became unemployed.

The treacherous business environment

High unemployment figures have come about through a treacherous business environment characterised by a fear of banks to lend to one another, and high international costs of credit. Accordingly, GDP growth estimates have been revised down as analysts expect the New Zealand recession to extend into 2009.

Stifled growth is most dramatic in the retail sector, with a contraction of 0.2 per cent in the last quarter. The next quarter will be a crucial one for retailers as they look to entice consumers to part with their cash through prolonged sales, building up to Christmas. As consumers shut their wallets and save where possible, many more sectors will begin to feel the pinch.

While inflation was the major concern last quarter, constrained commodity prices and spending have well and truly dismissed such concerns. This has led the way for severe interest rate cuts by the Reserve Bank, with many expecting an official cash rate of four per cent by mid next year. However, despite these anticipated interest rate cuts, building investment intentions for Auckland city businesses have nosedived with a net 36.4 per cent of businesses expecting to invest less in buildings in the next 12 months compared with 9.4 per cent last September.

The downside of falling commodity prices (reduced global demand for New Zealand products) has been partially offset by the depreciating NZ dollar (the trade-weighted index was 63.8 in September, down from 71.6 in March). Nevertheless, New Zealand exporters are reporting major drops in profitability this year. This is particularly concerning for the rest of the economy, such is the reliance on the export sector for New Zealand. Details of exchange rate movements are explored further below.

Returning home?

The annual rate of decrease in net migration for Auckland city slowed somewhat in the year to September to -5.6 per cent (previously -6.9 per cent in the year to June 2008).

Anecdotal evidence received by recruitment companies suggests that many New Zealanders are beginning to come home in response to the financial crisis, which would further slow the rate of decrease in net migration.

Along with increasing unemployment, these two factors may be contributing to a loosening of the labour market.

Building consents

Building consents in Auckland city have two striking patterns: the value of non-residential consents is increasing, while residential building consents are on the decline. Further, annual average data (as used here), understates the full extent of this decline.

In the September quarter, residential consents dropped by 15 per cent and there were only 17 consents for apartments, compared to 466 in the June 2008 quarter and 234 in the September 2007 quarter.

In contrast to this, the annual value of non-residential building consents has risen sharply over the last three quarters. This has been driven by an increase in the value of consents for new buildings, while the value of consents for alterations to existing buildings has decreased slightly.

It is expected that the value of new building consents will start to decline over the next few quarters as the credit crunch continues.

Focus on exchange rates

Being a small and very trade-reliant country, New Zealand is very vulnerable to exchange rate fluctuations.

The combined value of imports and exports is 45 per cent of New Zealand's GDP making such fluctuations highly influential.

The financial crisis has wreaked havoc on exchange rate markets. More importantly, our currency has become volatile against our main trading partners, which has negative implications for all businesses in the planning process, and especially sectors heavily reliant on exports and imports.

Figure one shows the movements of the New Zealand dollar against our four main trading partners.

New Zealand exporters/importers

A drop in exchange rates is usually a boon for exporters, whose goods appear cheaper on the international market. However, exchange rate depreciation has been accompanied by massive reductions in global demand. The result is a significant fall in commodity prices across the world.

Exchange rate depreciation has not been enough to offset the fall in demand, leaving exporters in a precarious position. Meanwhile importers are even worse off as they are stuck between higher product costs, and lower domestic demand.

Movements against the greenback and the pound sterling

After reaching a 20-year high in March 2008, the New Zealand dollar has plummeted against the $US (as have most of the world's currencies).

The $US is a highly liquid currency, and the premier global reserve currency, making it a safe currency to invest in. The $US typically gains strength in times of uncertainty as investors pull out of risky currency with low liquidity (including the $NZ). The pound sterling is the third most popular global reserve, and therefore similarly affected.

Movements against the yen

The $NZ has depreciated more against the Japanese yen than any of the other currencies evaluated here. The same reserve currency concept explains much of the depreciation of the $NZ against the yen (the yen is the fourth most popular reserve currency).

In addition, the large depreciation against the yen has also come about from the so-called carry trade between Japan and New Zealand.

Carry trade exists when investors take advantage of low interest rates by borrowing heavily in low return currencies, and investing in high return currencies.

With interest rates in Japan as low as 0.5 per cent and interest rates in New Zealand as high as 8.5 per cent earlier in the year, New Zealand became a very popular destination for Japanese investment (the carry-trade).

As the Reserve Bank has begun cutting rates, the carry trade has become less profitable, and investors have sold New Zealand dollars in large quantities, contributing to its rapid devaluation.

Movements against the Australian currency

The $NZ has been appreciating against the $AU since the beginning of the year. Since the crisis took hold in August, the $AU has been our only main trading currency to fall in value relative to the $NZ.

Australia is open to many of the same market forces as New Zealand and has therefore experienced much of the same volatility against the $US, £UK and yen.

The key difference between New Zealand and Australia at this stage is that the Australian Reserve Bank (ARB) is further through its monetary adjustment process than the Reserve Bank of New Zealand. Since September, the ARB has cut its rate by two percentage points to 5.25 per cent while New Zealand's official cash rate has been cut by 1.5 percentage points to 6.5 per cent.

In tandem, Australia's mining industry has also been heavily affected by low global commodity prices.

Focus on employment in Auckland city

In October of this year, Statistics New Zealand released the latest Business Demographic data for Auckland city.

It shows that in February 2008, there were 321,030 people employed in 66,805 businesses in Auckland city. This comprised 50 per cent of the region's employment and 42 per cent of its businesses.

The largest sectors of employment include professional, scientific and technical services (13 per cent of the city's employment, 42,950 employees), manufacturing (10 per cent, 30,530) and wholesale trade (nine per cent, 29,890).

Over one-fifth (21 per cent) of businesses were in the rental, hiring and real estate services, a further 17 per cent in professional, scientific and technical services and 11 per cent in financial and insurance services.

Compared to the rest of the region, or New Zealand, the city has relatively higher shares of employment in key office based sectors. These include professional, scientific and technical services, administrative and support services, financial and insurance services and information media and telecommunications services.

Conversely, the city has relatively lower shares of employment in the land-intensive sectors of manufacturing, construction, agriculture, forestry and fishing, transport, postal and warehousing and retail trade.

Between February 2000 and February 2008, the city experienced a net increase of 51,170 employees and 14,483 businesses, equating to an average annual employment growth rate of 2.19 per cent. This was slower than the rest of the region (2.28 per cent) and New Zealand as a whole (2.75 per cent). However, in the period between February 2007 and February 2008, the city's employment increased by 2.52 per cent, which was greater than the rest of the region (2.28 per cent) and New Zealand as a whole (2.02 per cent).

The greatest employment growth in the last year (February 2007 - February 2008) has occurred in Auckland city's largest industry sector, professional, scientific and technical services.

Transport, postal and warehousing and public administration and safety were the next largest areas of growth.

Together, these sectors accounted for nearly two-thirds of the city's employment growth in the last year and had the fastest growth rates (excluding mining).

Conversely, manufacturing was the only significant sector of decline, shrinking by four per cent and losing 1,200 employees.

Clearly, global events of the last few months and the subsequent impacts on employment in Auckland city have not been captured in this business demographic information.

Results from the Household Labour Force Survey suggest that over the last quarter, employment impacts have been most sharply felt in the electricity, gas, water and construction sector, the accommodation, cafes and restaurants sector and the finance and insurance sector.

However, the precise scale of sectoral impact may not be accurately determined until the release of the 2009 Business Demographic data in the middle of next year.

Published December 2008