Economic and Labour Market Update - August 2009

There seems to be increased willingness amongst the country's policy-makers and economic commentators to examine the weaknesses within the economic systems that have created the global economic storm that has hit our shores wave after wave over the last year.

The recession still dominates the New Zealand economy, yet talk about recovery is creeping into the media¹ and the Treasury;² and an outright economic ‘depression' seems to have been successfully averted. Although it is generally accepted that New Zealand appears to be weathering the storm better than its OECD counterparts, this does not detract from the ‘battering' that certain parts of the region's economy have experienced - most notably manufacturing exporters, and the many individual Aucklanders who have lost their jobs over the last year. With the spillover of the economic crisis into the real economy continuing - affecting ordinary people and their livelihoods - it is welcome to see debate emerging about the rationale of our economic system.

GDP

The recession has hit Auckland harder than the rest of the country, particularly because the two most exposed sectors - manufacturing, and wholesale and retail trade - are comparatively strong in the region, relative to the rest of New Zealand.³ Growth in Gross Domestic Product (GDP) in the Auckland region is estimated to have declined by 1.4% in the year to March 2009, a higher rate of decline than felt by the national economy, which declined by 0.9% over the same period.

Current Account Deficit

The outlook for the world economy stabilised in July, with business confidence surveys in most of the major economies returning more positive results. Growth is expected to resume in late 2009, or early 2010 . This is promising news for our export sector. However, New Zealand's balance of payments current account deficit (relative to GDP) remains sobering. In 2008, New Zealand ranked 19th out of 191 countries for highest absolute amount of current account deficit (Figure 1). The size of this deficit presents a significant challenge to management of the economy, and raises important intergenerational equity issues. These debt levels are caused by high levels of household borrowing, largely in the property market, which is an unproductive sector in terms of capital return or potential to generate foreign currency.

Figure 1 Current account balance as a percentage of GDP

Housing prices

Auckland property prices rose in July, up $10,000 on the average sale price from the previous year, and with 24% more sales than July 2008. This increase in demand for property, and corresponding decline in excess supply, has led market analysts to suggest that we are now seeing a stabilisation in property prices. However the low levels of building activity in the region and the fact that an estimated 8,000 new dwellings per annum are now required to accommodate Auckland's growing population, means housing stock shortages are now likely to occur.

Official Cash Rate

Consistent with monetary policy over the last 10 months, on the 30th of July the Reserve Bank of New Zealand left the Official Cash Rate (OCR) unchanged at 2.5%. The governor, Alan Bollard, signalled that the rate will remain at this low level for the forthcoming year. This was an attempt to influence the exchange rate, which at its current level is reducing the competitiveness of our export sector and encouraging consumption of imports to the detriment of New Zealand's current account deficit. Currently, manufacturing industries are a stalwart of the Auckland economy, contributing 13.6% of Auckland's gross regional product, and contributing 57% to the region's international export value.