Regions on a roll, suggests economic overview

Westpac’s latest Quarterly Economic Overview reinforces the impression given by the results of the Westpac New Zealand Franchise Awards – that the regions are where it’s all happening at the moment. While Auckland and Canterbury might be experiencing lacklustre economies and flat or falling house prices, there is a completely different feel in some other parts of the country, where local economies are at their most buoyant in years.

For the national economy overall, ‘It is now clear that the economy is indeed improving,’ says Dominick Stephens, Chief Economist NZ for Westpac. ‘We expect the economy will continue to improve for a while yet, before a renewed slowdown sets in for the early-2020s.

‘On the inflation front, we are hearing increasing concerns about costs, and wage inflation is clearly picking up. This and other signs of burgeoning inflation pressures have seen us lift our inflation forecast. But competition in the retail sector and falling prices in areas the government controls, such as tertiary education, are large offsetting forces. Overall, we expect inflation to remain fairly contained at around 2 percent for the coming few years.’

Growth despite lack of confidence

The Overview casts some doubt on the sentiment behind recent business confidence surveys that have been hitting the headlines since the last election. It says, ‘The New Zealand economy has continued to grow steadily over the last year, defying the crisis of confidence that has been portrayed in business surveys. Recent GDP figures have been somewhat choppy – the details suggest that growth was temporarily soft in the first quarter of this year and temporarily strong in the second – but the underlying picture has been one of moderate growth, though down from the heights reached a couple of years ago.

‘We have slightly upgraded our GDP forecasts for the next couple of years. Our view remains that the next phase for the local economy will be a pickup in the pace of growth, aided by government spending, low interest rates and renewed growth in homebuilding. But we also see … slower population growth and a weaker housing market to weigh on spending as we head into the next decade.’

Labour market tightening

One of the biggest concerns for franchisors at the moment continues to be the availability of suitable staff, according to the Franchising Confidence Index published by Franchize Consultants. https://franchise.co.nz/article/2845 There is little sign of relief in this area in the near future.

The Overview comments, ‘There’s now a more convincing case that the labour market has entered ‘tight’ territory. The difficulty of finding workers has been a long-running refrain in business surveys and anecdotes. But it’s only more recently that there has been evidence of rising cost pressures for businesses, as they are forced to increase pay rates to attract or retain workers.

‘The unemployment rate fell sharply in the September quarter, from 4.4% to a ten-year low of 3.9%. We’re wary of this result, given the volatility of the survey – movements of this size are not unprecedented, and are often reversed the next time. Nevertheless, the positive trend in employment appears to be intact. And with GDP growth set to pick up a little in the near term, we expect that unemployment will be below its neutral, or non-inflationary, level over the next few years.’

Population change affecting regions

Looking at regional differences in more detail, the Overview says: ‘While the economic picture is turning more positive at the national level, some distinct regional differences are becoming apparent. In part, these differences are the consequence of a pattern of regional population growth that is very different today compared to a few years ago. Auckland still has the fastest growing population, but the pace has slowed substantially from its peak in 2015. Canterbury’s population growth rate has also slowed following an influx of construction workers and returning residents after the earthquakes. In contrast, population growth stepped up sharply across the central and lower North Island and in Otago between 2015 and 2017, and has slowed only slightly in the past year.

‘Anecdotally, some of these population patterns are due to Aucklanders leaving for greener pastures in smaller towns. However, changing patterns of overseas migration are probably playing a bigger role. Foreign arrivals are slowing, and a growing number of those who arrived in recent years on temporary visas are now leaving. Since migrants tend to be concentrated in Auckland, this partly explains why population growth has slowed more in Auckland. Meanwhile, the number of New Zealanders heading to Australia is lower today than it was in the mid-2010s, an effect that is spread more evenly across the country.

‘While the strength outside Auckland and Canterbury may last for a while yet, it won’t persist indefinitely. The current strong momentum has partly been driven by strong population growth. When this unwinds, house price growth and construction activity in these regions will cool and consumer spending will take a breather.’

Inflation not an issue

Franchisors and franchisees will be relieved to know that while inflation has picked up and is set to rise to a bit above 2 percent in the near term, ‘It is still expected to remain well contained within the RBNZ’s 1 percent to 3 percent target band over the next couple of years, with softness in retail prices a continuing drag.’

It’s worth noting that while increases in petrol prices provided a temporary lift in inflation, they have eased back in recent weeks. This creates some uncertainty for mobile businesses, especially for distribution franchises which have already announced price increases on the back of the expected higher fuel prices.

 

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