Quarterly Economic Monitoring Report

May 2014
Introduction
Grow Wellington closely monitors the economic performance of the Wellington
region. This report interprets economic data released over the three months to May
2014 including data that is specific to Wellington and not widely reported on1. All
references to Wellington are for the Wellington region unless otherwise stated.
Report Highlights
Economic activity in Wellington is expanding but there is the possibility of higher
interest rates and slowing house prices dampening business and consumer
confidence.
The large net migration inflows and other factors causing an overheated housing
market in other parts of the country are not occurring to the same extent in
Wellington, yet the monetary tools used to address the house price inflation are
impacting everywhere including Wellington.
While not as large as New Zealand overall, Wellington is still experiencing some
inward net migration flows as, consistent with the national trend, the numbers of
people leaving Wellington for overseas falls. Unlike the rest of the country, arrivals
into Wellington (returning expats and new New Zealanders) are flat or falling which is
a concern.
Wellington is experiencing some job growth and employers are signalling they want
to take on more staff. A lot of the job growth to-date has occurred in construction.
More and more Wellingtonians previously outside the work force are looking to enter
it with Wellington having the largest and fastest growing labour force participation
rate in the country. This will widen the pool of skills available to employers.
Wellington public servant numbers have stabilised but the Governments Budget
reveals that the numbers are expected to flat line in coming years meaning the
Wellington economy will not be able to rely on a boost from the public sector.
Retail sales and commercial guest nights are relatively subdued in Wellington but
can be expected to pick up as the recovery takes hold and confidence grows.
Wellington exporters will be disproportionally disadvantaged by the downturn in
Australia and will not benefit as much as New Zealand overall from rising demand
expected from China.

Much of the available data at the regional level, official and otherwise, is less robust than it is at the national level and so
annual averages are used where appropriate to reduce volatility and increase reliability.

Wellingtons economic activity expands and the outlook remains positive

The New Zealand economy grew 2.7% in the year ended December 2013. Statistics
New Zealand does not calculate regional GDP on a regular basis but while
Wellington is lagging New Zealand, recent data releases indicate things have picked
up since the second half of last year. Notwithstanding a positive outlook there are
some downside risks for the Wellington economy.
As with the rest of the country, the Wellington economy is benefiting from a number
of factors including the Canterbury rebuild, high export prices and migration-driven
population growth.
At last weeks Budget the Government produced a 4.0% growth forecast for New
Zealands GDP in the year to March 2015 the highest since 2004 and higher than
most of our OECD trading partners. Wellington can be expected to participate in this
growth, and economic indicators released in the last three months are consistent
with that.
The ANZ composite index of economic activity for Wellington, which is an aggregate
of a range of indicators, recorded its seventh consecutive quarterly rise. The index
grew 3.8% over the year to March 2014 compared with the national average of 4.1%
and Wellington was the sixth best performer out of the 14 regions.
but interest rates rises are starting to bite
In the quarter since our last report, the Reserve Bank has twice lifted the official cash
rate (OCR). It now stands at 3.0% up from the low of 2.5% where it remained for
three years. The higher interest rates which have flowed from this are showing
some signs of slowing economic activity in Wellington.
as reflected in slowing house price rises.
Together with the Reserve Banks loan-to-value ratio (LVR) limits, the OCR hikes
already look to be having a dampening effect on Wellingtons housing market with
house sales recording another trend decline in April 2014 according to Real Estate
Institute of New Zealand (REINZ) figures. The REINZ median sales price for
Wellington rose 4% over the last year from a 1.4% annual increase last month.
However, closer analysis reveals that a drop in the numbers of sales in the lower
price brackets, ostensibly due to the LVRs, is responsible for much of the increase
a feature apparent across the country.
The REINZ Housing Price Index (HPI), which adjusts for the mix of properties sold
each month (and so removes much of the LVR effect), has increased only 1.0% for
Wellington in the year to April 2014 (while the New Zealand index, driven largely by
Auckland and Christchurch, increased at a much higher 8.5% over the same period).
In other words Wellington house prices have not been increasing as fast as headline
data suggests.

House prices are an important economic indicator as they are a significant driver of
confidence and household consumption. The Wellington HPI had been trending
upwards since 2012 but growth now looks to be slowing.
Higher interest rates, partially due to rising house prices nationwide, are likely to
further slow Wellington house prices.
There are a range of factors contributing to the nations house price rises including
land shortages and migration-driven population gains predominantly in Auckland.
Net inward migration flows into Wellington
As has been well documented, New Zealand is currently experiencing strong growth
in net inward international migration as the improving economy drives fewer people
to leave for overseas, and more New Zealanders and overseas citizens to return or
arrive for the first time.
Wellington is also benefiting from this trend although not to the same extent. In the
12 months to April 2014, permanent and long term migration arrivals for Wellington
exceeded departures by 674 people. Equivalent numbers for Auckland and New
Zealand are 16,006 and 34,366 respectively. The Governments Budget forecast the
gap to rise to an annual peak of 38,100 at September 2014. Some economists are
forecasting it to go higher.
An upward trend in net migration for Wellington will provide a boost to the local
economy by stimulating demand and increasing the pool of available labour but net
arrivals are much smaller than New Zealand on a proportionate basis and so are
unlikely to have anywhere near as much of an impact on the local housing market.
As the graph below shows, Wellington has only recently moved into net positive
territory due to proportionately fewer arrivals into Wellington. The cyclical departure
pattern is almost identical to New Zealand on a proportionate basis.

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NZ Arrivals (lhs)

NZ Departures (lhs)

Wgton Arrivals (rhs)

Wgton Departures (rhs)

Wellington

New Zealand

Permanent and Long Term Migration

On balance the net inflows look to be continuing their rise but it is concerning to note
arrivals into Wellington are starting to turn down. This and the lower arrivals track
since 2009 suggests returning and new New Zealanders are opting for other centres.
This is a concern and is an important reason for Grow Wellington and the Wellington
Regional Strategys focus on talent attraction activity and efforts to promote
Wellington as a destination for potential migrants and returning expats.
Wellington city dominated the regions April figures in both the growth in arrivals and
the reduction in departures with a net annual gain of 1073 people (compared with the
regions gain of 674 people). It is clear from this that the impacts of migration-driven
population gains will be stronger in Wellington city than in the rest of the region.
reflect lifting business and consumer optimism.
The greater confidence that is causing fewer Wellingtonians to leave is reflected in
the results of recent consumer and business confidence surveys.
The ANZ Business Outlook Own Activity Index for Wellington stood at 52.1 in April
2014. This means a net 52.1% of local businesses are expecting their own business
activity to improve over the next 12 months (the percentage expecting an increase
less the percentage expecting a decline). While down from its record high of 64.3 in
December 2013, this is still high by historic standards and it bodes well for economic
activity in the region. The figure for New Zealand overall was 52.5%. After a
prolonged period of closed wallets, Wellington businesses are indicating an intention
to increase staff numbers and raise investment levels both of which are important
for economic growth. Employment growth means better resource utilisation and
higher investment is key to raising productivity growth.
Consumer confidence is also high. The ANZ-Roy Morgan Consumer
Confidence Index for Wellington has been steadily rising for about 18 months now.
At 134, it is just off its post-GFC high of 135.8 recorded in January 2014.

Consumer

Business

ANZ Business Outlook - Activity Outlook Net Index - (% improve/rise less % worsen/decline)
ANZ-Roy Morgan Consumer Confidence

Feb-14

Aug-13

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Business

-40

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80.0

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-20

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100.0

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120.0

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20

Aug-07

140.0

Feb-07

40

Aug-06

160.0

Feb-06

60

Aug-05

180.0

Feb-05

80

Aug-04

200.0

Feb-04

Consumer

Wellington Confidence Measures

The lift in house prices to-date together with a stronger labour market, greater job
security, and a perception that government retrenchment has eased have all
contributed to this increase in consumer confidence. It is likely it will translate into
higher household consumption if it is sustained but it is possible higher interest rates
and the expected slowdown in house prices will temper this confidence somewhat.
Skilled vacancies and numbers of job ads are high
The prospects for job growth in Wellington are positive in that a range of surveys are
revealing employer intentions to take on more staff in the coming months. ANZs
longstanding Job Ads series shows the number of job ads (internet and newspaper
combined) were up 6.9% on the same time last year. MBIEs Online Skilled Vacancy
Index for Wellington as at April 2014 was 4.3% higher than it was a year ago
compared with 9.4% overall. There is a note of caution in that on a monthly basis
both these measures look to be slowing which is a little surprising given the
strengthening economy. However, there is no evidence of a trend here and the
measures are still high by historic standards both just off their post-GFC peaks
which suggests a positive outlook for job creation.
It is revealing that Wellington employers are reporting labour shortages at a time
when unemployment has been relatively high. As the economy improves, the labour
market tightens and unemployment falls, the difficulty in finding skilled labour can be
expected to intensify. It is important for the region that these skill shortages are
addressed. Employer intentions to take on more staff will come to nothing if these
people cant be found. This is another important reason for Wellington Regional
Strategys work on talent attraction and its focus on education and the workforce.
Nationwide, according to the Index, the strongest growing occupations over the year
were construction managers (up 57%) and ICT sales professionals (up 136%).
Anecdotally these occupations are also in high demand in Wellington.
which translated into employment growth for Wellington
Higher vacancies and increased job ads are already showing up in increased jobs. It
is notable though that the growth to-date has been in a relatively narrow range of
sectors.
On an annual average basis Wellington employment over the year to March 2014
was 0.7% higher than the March 2013 year according to Statistics New Zealands
Household Labour Force Survey (HLFS). Of the 15 sectors regional data is
available for, only eight grew. The sectors where the most job growth occurred were
the construction and the retail and hospitality sectors, with respectively 14.5% and
9% more jobs than at the same time last year. Much of the construction employment
is likely to be driven by earthquake strengthening in Wellington as well as related to
the Canterbury rebuild, and the state highway roading projects. It should be noted
that the latter infrastructure investment, when finished will provide an important
productivity boost for the regional economy.

Wellingtons average unemployment rate for the March 2014 year was 6.0% down
from 7.1% the year before while the equivalent New Zealand figure was 6.1% down
from 6.8%.
and increased labour force participation.
A feature of the labour market currently is that people previously not seeking work
are joining the labour force (to be employed or unemployed i.e. into work or to
commence their search). The so-called participation rate is at record highs for both
New Zealand and Wellington and, as the graph below shows, the increase has been
particularly marked for Wellington which recorded a participation rate of 72.8% of the
working age population on an annual average basis, the highest regional rate in the
country. The unemployment rate would be lower if not for this influx.

74.0
72.0
70.0
68.0
66.0

Wellington

64.0

NZ

62.0
60.0

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% of Working Age Population

(annual average)

Labour Force Participation Rate

The improved employment outlook for Wellington is one reason for the increased
participation as previously discouraged workers opt to enter the job market but there
also seems to be a structural shift in participation as the participation rate of older
age groups and females increases.
The increasing participation rate (both cyclical and structural) is good news for
Wellington as it widens the pool of skills available to employers looking to recruit.
Job growth combined with productivity growth is an important component of
economic growth. As well as increasing employment, higher productivity per
employee is essential if the Wellington economy is to grow. Higher skill levels and
increased investment are key to productivity growth. In turn, higher productivity is
also key to wage growth.
The strengthening labour market has yet to translate into significant wage growth but
upward pressures can be expected in coming months. Wellington ordinary time
hourly wages in the March quarter 2014 were 3.5% higher than the same time a year
ago compared with an increase of 2.5% for the country as a whole.

Government spending pressures point to stable public service numbers

State Sector Commission figures released last month showed that the number of
Wellington public service jobs was 18,493 (Full Time Equivalents) in 2013, just
ahead of the previous peak of 18,448 in 2009.
Indications that retrenchment in public service numbers has ceased will be
welcomed by businesses contracting with government departments and with public
service customers and can be expected to boost confidence generally.
However, it is important to note last weeks Budget confirmed that fiscal spending will
continue to be tight in coming years and closer investigation of the Budget
documents reveals that core Crown personnel expenses are to be held below the
rate of wage inflation in the next four years.
This suggests that the Wellington economy will not be able to rely on a public sector
boost in coming years.
and property sector rationalisation.
The other implication of Government moves to make savings in Wellington is the
commercial office space it will free up in the Wellington CBD as departmental
accommodation is better rationalised. This will to some extent offset the tightening
impact as commercial space is withdrawn for seismic strengthening.
In the meantime, the value of commercial consents issued in Wellington more than
doubled in the March quarter (seasonally adjusted) to hit a five year high but this
series is volatile.
Retail sales in Wellington remain subdued
Wellingtons retail activity has been relatively weak for some time now and this at a
time when prices have been suppressed by a relatively strong exchange rate. While
annual figures to March 2014 show Wellington sales were up a healthy 3.3%
(compared with 3.5% for New Zealand overall) the growth has been focussed on a
limited range of sectors whereas New Zealands retail growth is more broad-based.
Wellington retail sales volumes after adjusting for seasonal effects were flat in the
March 2014 quarter compared with a 0.7% increase for New Zealand overall.
With the improved confidence levels Wellington consumers are reporting, it is likely
that retail growth will soon pick up and broaden across sectors but there is a risk
that the recent and ongoing lift in interest rates and the expected curtailing of house
price increases will slow growth in household consumption.
as do commercial guest nights.
Large numbers of domestic and overseas visitors have helped boost economic
activity particularly in the retail and hospitality sectors. Commercial guest nights in
the Wellington region were 2.74 million in the 12 months to March 2014.
7

This was up 2.3% on the equivalent 12 month period a year ago compared to a 4.2%
increase for New Zealand as a whole. However, the trend for commercial guest
nights for Wellington has levelled off recently compared with New Zealand overall, as
shown in the graph below, and the elevated exchange rate is having an impact on
how much overseas visitors are spending as well as their numbers.

Commercial Guest Nights

Annual Numbers - Indexed

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Wgtn Domestic

900

Wgtn International
800

NZ Domestic

700

NZ International

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The exchange rate continues to be a headwind for exporters.

The New Zealand dollar has appreciated 20% on a trade weighted basis over the
last two years.
The higher exchange rate has been, and will continue to be, a challenge for the
regions exporters and although the exchange rate isnt as much a factor for
Wellington as it is for other parts of the country with higher export concentrations, it
continues to provide a headwind for the regions economic recovery.
Offsetting this, the outlook for New Zealands trading partner growth is improving
which will support the demand for exports. Wellingtons export base is more
focussed on services and manufacturing and less on commodities than the rest of
country. Because of this, Wellington is currently disadvantaged by the current
downturn in Australia and will not benefit as much as New Zealand overall from the
renewed rising demand expected from China.
Lifting Wellingtons exports is crucial for growing its economy and a key focus of
Grow Wellington and the Wellington Regional Strategy.