Economic and Labour Market Update
August 2010
1. Introduction
The signs are that Auckland’s economy is experiencing some recovery after the downturn seen over recent quarters, but there is still a long way to go. Recently released unemployment figures show a further rise in the number of those out of work in the region (particularly among the young, Maori and Pacific workers), national business confidence has fallen for the last three quarters,1 households continue to exercise spending restraints, with retail spending growing only moderately, housing turnover still is in decline and household credit growth remains weak. As Tony Alexander has recently observed, “Generally, people are looking to save as much money as they can now….[when asked] very few have plans which is quite a contrast from 2 to 3 years ago. They seem to have shut up shop with no signs of this changing”.2
That inflation was somewhat weaker than expected in June, with the Consumer Price Index rising 0.3% in the quarter to be 1.8% higher than a year earlier, highlights that consumers continue to exercise restraint.3 Headline inflation is expected to increase in the coming quarters however, reflecting the 1 October GST rate rise.4
Last month the Reserve Bank of New Zealand raised the Official Cash Rate (OCR) to 3.0% as was widely expected. The Bank has indicated caution regarding any further increases, in light of current economic developments, stating “The pace and extent of further OCR increases is likely to be more moderate than was projected in the June Statement. Our policy assessment will be continually reviewed in light of economic and financial market development.”5 Interest rates will continue to increase although the OCR is not expected to reach 5% at the end of 2011 as previously forecast. This presents both good and bad news for borrowers.
On a positive note, the continuing recovery in the world economy is supporting high international commodity prices and demand for New Zealand’s main exports. New Zealand’s main trading partners - Asia and Australia - recorded strong economic growth which will help boost exports over 2010.6 July data, however, shows that global economic recovery may be easing and therefore it is uncertain whether New Zealand’s initial export led recovery will be sustained.
2. The State of the Auckland Economy
Infometrics Ltd. have updated their annual report on the Auckland regional economy over the last year.7
Auckland’s economy is estimated to have shrunk by 0.5 per cent in the year to March 2010 – driven in the main by the sharp decline in global trade, and broad consumer restraint. While manufacturing and wholesale trade activity especially suffered, there was a positive contribution this year from property and business services. As the figure below shows, annual average change in Auckland’s GDP has mirrored the national trend over the last decade, albeit slightly muted rates of change.
In line with this contraction, the unemployment rate continued to rise, averaging 7.3 per cent in the year to March – higher than the national rate (6.4 per cent). This upward movement first emerged in 2008.
Employment was down 1.5 per cent over the year (in line with national decrease of 1.5 per cent). Particularly large numbers of workers were affected in the retail trade sector, and also in manufacturing – these two sectors alone accounted for the loss of more than 6,000 jobs.
Proportionately, the loss of jobs was highest in the accommodation, café and restaurant industry as households and businesses opted to spend less on dining and drinking out. This curtailment was supplanted by a lift in supermarket and grocery retailing – contributing to a rise in retails sales during this period, reversing the dramatic slump in sales over the period 2007 to 2009.
The continuation of a downward trend in consents for new residential developments has prompted Infometrics to caution that “A significant undersupply of residential dwellings is developing”. This is based on the calculation that around 8,000 new dwellings are needed every year to accommodate the on-going growth in households.
Figure 1: Gross Domestic Product. (Average annual change)
Figure 2: Annual number of new residential consents in the Auckland region
3. Household Labour Force Survey
Unemployment in the Auckland region has risen to a seasonally adjusted annual average of 7.8 per cent at the year end June 2010, compared with 5.7 per cent at June 2009.
Over the year to June 2010, the number in the working age population is estimated to have continued to rise, in line with general population growth and the age structure of Auckland’s population. Yet there are higher numbers who are not in the labour force, and labour force participation has declined slightly to 67.6 per cent (annual average) (Table 1).
Table 1: Auckland labour force status comparisons
| Quarter end March 2010 (snapshot) | Quarter end June 2010 (snapshot) | Year end June 2009 (annual average) | Year end June 2010 (annual average) | |
| Number employed (000) | 653.6 | 644.7 | 655.9 | 649.0 |
| Number unemployed (000) | 56.3 | 61.3 | 39.7 | 54.9 |
| Number not in the labour force (000) | 343.7 | 342.4 | 317.7 | 338.1 |
| Number in the working age population (000) | 1,053.6 | 1,048.4 | 1013.4 | 1041.9 |
| Labour force participation rate (%) | 67.4 | 67.3 | 68.7 | 67.6 |
| Unemployment rate (%) | 7.9 | 8.7 | 5.7 | 7.8 |
The marked differences in unemployment rates among different population groups – particularly in terms of age and ethnicity have not abated, and in some cases have become worse.
The extent of youth unemployment is evident in Figure 3. In particular, unemployment among 15 to 19 year olds has increased to a staggering 29.9 per cent in the year end June 2010, and 13.6 per cent among 20 to 24 year olds.
Pacific and Maori continue to be particularly vulnerable, recording the highest rates of unemployment. Pacific unemployment reached 15.2 per cent in the year ended June 2010, equivalent to an estimated 11,500 people.
Figure 3. Unemployment rate by age group (rolling annual average) to yr end June 2010
Source: Statistics New Zealand Household Labour Force Survey.Table 2. Overview of unemployment rates among groups (annual average) (%)
| yr end June 2009 | yr end June 2010 | |
| Total | 5.7 | 7.8 |
| 15-19 years | 20.3 | 29.9 |
| 20-24 years | 11.2 | 13.6 |
| 25-39 years | 4.8 | 6.7 |
| 40-54 years | 3.4 | 4.9 |
| 55 years + | 2.6 | 3.5 |
| Female | 5.9 | 8.2 |
| Male | 5.5 | 7.5 |
| European | 4.0 | 5.7 |
| Māori | 10.8 | 14.4 |
| Pacific | 11.0 | 15.2 |
| Asian | 6.6 | 9.4 |
| MELAA/Other | 9.9 | 7.2 |
For a more detailed analysis on regional Household Labour Force Survey findings, please refer to Auckland Regional Household Labour Force Survey: Quarterly Overview (June 2010 quarter), available on Knowledge Auckland.
4. The Outlook for Auckland
Looking ahead, Infometrics Ltd. predicts that regional and national economic growth will continue to strengthen – underpinned by stimulus from monetary and fiscal policy in the short term, but gradually enjoying the benefits of an improving international economy, (lagged) improvement in the labour market, and returning investor and consumer confidence. Growth is expected to reach 4.1% in the year to March 2012.8
As New Zealand’s largest regional economy, Auckland’s fortunes tend to be synchronised with national economic performance. Auckland will experience a slow lift in activity over the second half of the 2010 calendar year before accelerating over 2011. Improvements in the labour market will lag the economic recovery, which means that a significant improvement in employment growth and the unemployment rate will not be observed in Auckland until early in the 2012 calendar year.
The largest industry contributor to Auckland’s economic growth over the next 18 months is likely to be manufacturing. This industry has experienced tough times over the past four years as it has battled with a high exchange rate and competition from low cost producers overseas. Although Infometrics do not expect the New Zealand dollar to depreciate to any great extent, rationalisations and efficiency gains within the industry, combined with recovery in world markets, will provide sustenance to manufacturing output.
Retail trade, wholesale trade and construction activity are expected to experience a reversal in fortunes over the next 18 months, as New Zealand’s export performance strengthens and consumer confidence strengthens.
Infometrics also maintains that Auckland construction activity will lift in 2011 for two key reasons. First, there is an underlying shortage of supply in the residential housing market. As confidence and strength return to the domestic economy later in 2010, more houses are likely to be built to meet the excess of housing demand. Second, government intentions for new infrastructure construction in the region are substantial. Mitigating these positive factors to an extent will be weaker building activity in the commercial market where there is currently an excess supply of office space.
One of the ‘powerhouse’ industries in Auckland over most of the past decade has been finance and insurance, which is likely to experience more subdued activity over the next year and a half. Finance and insurance activity held up remarkably well during the global financial crisis. Auckland’s position was bolstered to a degree by rationalisation of bank head offices and central administrative activities, which involved relocating Wellington operations to Auckland. Relocation will not occur to the same extent over the next 18 months. At the same time, new bank lending will be constrained by a flat housing market and more cautious mortgage and consumer lending.
Prepared by Alison Reid and Penelope Tuatagaloa, Social and Economic Research and Monitoring Team, Auckland Regional Council.
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