Economic and Labour Market Update - September 2009

The global economy is experiencing higher than expected growth.

Business confidence continues to pick up slowly¹ , leading the NZ Institute for Economic Research to conclude that New Zealand is now “on the cusp of a fragile recovery” – albeit an uncertain one² .  Treasury is now forecasting that the June quarter is likely to be the last period of contraction for the New Zealand economy³ .

Treasury is now also more optimistic that unemployment will not reach the levels previously anticipated.  However, as a lagging indicator, unemployment is still predicted to continue to rise, peaking in the September quarter 2010.  Regional unemployment sits at 6.6%.

The Reserve Bank of New Zealand will next announce any changes to the official cash rate (OCR) on October 29th, in their Monetary Policy Statement. No change to the OCR is expected, which should result in low interest rates continuing for some time yet. Low interest rates are favourable to borrowers but could be a double-edged sword, posing a threat to economic recovery if that recovery is reliant on housing market growth.

 The export industry continues to struggle in the face of high exchange rates. World economic recovery is a pre-cursor to growth in our export sector, and thus the (earlier than anticipated) signals of growth in our trading partner economies is welcome news. New data for New Zealand’s overseas merchandise trade was recently released, showing that the value of both merchandise imports and exports fell in July 2009, compared with July 2008 (down 20.9% and 7.3% respectively), which improved the trade balance deficit over the year.

The $252million decrease in export values in July 2009 was led by a decrease in crude oil exports ($119 million drop) followed by a reduction in meat and edible offal exports, (down $50 million). The value of NZ’s largest export category, milk powder, butter and cheese, was almost the same as July 2008, despite quantities being over fifty percent higher⁴ .

It is likely that Auckland is now entering a period of housing shortages⁵ . A recent report on housing affordability in Auckland was critical of the lack of effective monitoring of housing supply and demand in the Auckland region⁶ . 

Residential construction is growing nationally – the July new building consent figures show a 5% rise from June national figures⁷ . In Auckland, 214 consents were issued in July, up by 23% on June figures. Auckland's higher than average figures are likely indicative of monthly volatility – however clear growth from the lows experienced in December 2008 and January 2009 is evident (Figure 1). However, July figures still represent a 17% drop from the number of consents issued in July 2008, and these figures are well below the record high number of consents issued in 2006/2007.

Figure 1. Monthly Residential Building Consents in the Auckland Region – 2005 to 2009

Source: Auckland Regional Council

Real estate sales are also up.  According to Barfoot and Thompson there were 830 properties sold in the Auckland region in August, up from 502 in August 2008, and an increase on the 779 houses sold in July 2009. The ‘keen interest (which) has returned to the Auckland market’ during August was seen as a traditional spring ‘bounce’, as ‘buyers feel prices are attractive, they can afford the repayments and are comfortable about their future job prospects’⁸ .

The median house price for sales in the Auckland region was $440,000 for July 2009, which was a slight increase on the median price ($435,000) for June. This is a modest increase on the median low of $422,000 in January 2009 (Figure 2). A mismatch in the real estate market between low levels of listings (supply) and slowly increasing demand (sales) has been cited as the primary reason behind recent increases in local house prices⁹ .

Figure 2. Median House Prices Auckland region  

Source: REINZ Monthly house price index

Small to medium sized enterprises are defined as those that employ 19 or fewer people. SMEs account for 41% of the nation's economic output.

Figure 3. Number of geographic units with 0-19 employees (February 2008)

Source: Ministry of Economic Development (2009) SMEs in New Zealand

While the region has a large number of SMEs, however, the proportion of total employment generated by SMEs is lower in Auckland, due to the fact that the regional economy attracts a higher proportion of larger businesses than other areas of New Zealand.

Two thirds ($491 million) of total screen industry expenditure flows into the Auckland economy.   Over half of all screen industry businesses (1,212) are located in Auckland, and 381 (74%) of screen production companies were based in the region in 2008.

Figure 4. Location of screen industry businesses by region

Source: Statistics New Zealand (2009) Screen Industry in New Zealand: 2008