Queen city goes slow

The Auckland region's economy is set for a slowdown as skill shortages, pressure on vital infrastructure, and rising interest rates begin to bite, a new report warns.
The Business & Economy 2005 study predicts growth for the region - which represents a third of the national economy - to fall from 3.8 per cent this year to 1.9 next year.

Meanwhile, unemployment will rise from 3.3 per cent to 4 per cent over the same period.

The report, by the Auckland Regional Council and Auckland City Council, highlights roading as one piece of infrastructure dragging on growth.

Labour shortages are affecting two-thirds of the region's businesses, while productivity growth continues to underperform the national average.

John McDermott, chief economist of the National Bank, which drafted the analysis, expected these factors would slow expansion for the rest of the year.

"Stress on infrastructure, and Auckland's ability to supply for the extra demand coming through, is really being tested.

"Another issue starting to emerge is the supply of future energy needs. It hasn't really hit Auckland companies yet, but as national gas reserves run out, where will Auckland's future energy come from?"

Rising interest rates, reflecting the lift in the Reserve Bank's official cash rate from 5.25 per cent last April to 6.75 per cent now, are also hurting.

Auckland's economy grew by 3.8 per cent last year, below the national growth rate of 4.8 per cent.

The performance saw the region slide further down the regional rankings to sit at 11th place among the country's 14 regions.

McDermott said most of the regions that rose in the rankings were rural communities benefiting from record commodity prices.

Auckland's growth reflected:

* One of the lowest unemployment rates in the country - 3.3 per cent compared with the national average of 3.6 - with business and financial sectors the biggest employers. However, most of the growth had come from additional labour inputs, rather than using labour resources more efficiently, the report noted. * Higher spending. This was boosted by the surge in wages, up 3.3 per cent a year over the last decade. A strong housing market also helped; average sale prices rose 11 per cent to $405,000 over the year, well above the national average of $296,000, but sales volumes eased 13.3 per cent.

* Population growth. Within the region this was roughly double the national rate, and this trend was expected to continue over the next decade with the population expected to reach 1.77 million by 2026. Migration was a key source of population growth.

McDermott also warned that as Auckland's growth had all come by adding people, not from productivity gains, the sustainability of the current boom was in question.

"Auckland's real per capita growth has been about 1 per cent, so its people are getting richer, but getting richer at a slower rate than the other major centres it competes with such as Sydney and Melbourne."

Despite the outlook, McDermott said a "doomsday scenario" was not expected.

"2005 looks good. There's a lot of momentum and it looks like it will continue for the best part of the year. The concern is how can you sustain that in 2006 when interest rates will be higher, particularly when a lot of the growth is built around the housing market?

"So in 2006 we might be looking at a 2 per cent growth scenario."