Employment rebounds, but all eyes on inflation

The Auckland economy is estimated to have grown 2.9 per cent year-on-year in the December quarter, taking growth through the year to 2.8 per cent. This is on par with the growth achieved through calendar 2012.

Three factors which will play a key role in determining the strength of employment and economic activity through 2014 will be net migration, consumer confidence and inflation, says Auckland Council’s Chief Economist, Geoff Cooper.

“Sustained high migration levels and a less cautious household sector could drive stronger spending and employment outcomes but, with inflationary pressures on the rise, this could well trigger a more aggressive interest rate tightening phase.”

The unemployment rate dropped to 6.3 per cent in the December quarter, the lowest quarterly result since the December quarter of 2008. “The rebound in employment was enough to offset a significant jump in the labour force – underpinned by rising participation levels and strong net migration figures,” says Mr Cooper.

Annual regional CPI inflation firmed to 1.5 per cent in the December quarter, having accelerated through the September quarter. Construction cost inflation has been the key contributor to the stronger headline result, with wage pressures still contained; but with the process of absorbing spare capacity now largely complete, and labour markets tightening, household inflationary expectations are on the rise.

Annual house price growth remains buoyant but sales volumes continue to decline. “The LVR limits have significantly constrained housing demand and their effect will be compounded by rising interest rates through 2014; however, demand is currently being bolstered by exceptionally high levels of net migration, which together with rising household incomes will help cushion house price growth.

“Net migration has the potential to boost housing activity in Auckland through 2014, but the major driver of construction cost inflation nationally is the Canterbury rebuild which continues to ramp up,” explains Mr Cooper.

Auckland’s economic growth has become increasingly broad-based: the upswing in housing construction is now having significant flow-on effects for other sectors in the economy, particularly manufacturing; consumer spending has gained momentum; and the external sector has been bolstered by strong visitor numbers and dairy prices and – to date – proved resilient in the face of a high NZ dollar and weakening Australian economy.

Excess capacity has now been largely absorbed and businesses have been taking on additional labour to cater for projected demand, but the outlook for employment growth is dependent on the strength of domestic activity – particularly housing activity and consumer spending – going forward.

“On balance, the outlook is for solid employment growth and a further decline in the unemployment rate through 2014 back towards 5.0 per cent. However, there are plenty of upside and downside risks to this outlook – both domestic and external”.

To view the latest Auckland Economic Quarterly, or archive editions, visit aucklandcouncil.govt.nz/chiefeconomist [latest edition available online from 11.00am Thursday 10 April].

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