Capacity challenges prevent stronger regional economic growth


Priority One Economic Outlook | An interview with Nigel and Brad

Following on from the recent publication of the Infometrics Quarterly Economic Monitor, and on the back of Priority One’s Economic Report, CEO Nigel Tutt took some time to discuss the Western Bay’s regional economic outlook, with Principal Economist and Director at Infometrics, Brad Olsen.

Through a series of five broadly focused questions, Nigel and Brad discussed; The billion dollar industry growth opportunities for New Zealand; Potential impacts of the on-going brain drain and how our population might be affected over the next few years; A comparison of the Western Bay economy to other regions in New Zealand and the influence of historically low unemployment; How potential constraints on the Port of Tauranga will have an impact on New Zealand; and some cheeky insight into how Brad would tackle some of these issues if his boots got bigger.

Learn more in the 15 minute interview below.

Capacity challenges prevent stronger regional economic growth

Economic activity bounced back in the second quarter of 2022, but an even stronger recovery was prevented by the capacity challenges facing regional economies. Infometrics’ June 2022 Quarterly Economic Monitor shows a 0.9% rise in annual economic activity for the 12 months to June 2022. However, activity in the June 2022 quarter is estimated to be 0.7% smaller than a year earlier, in part because the June 2021 quarter was red hot, making recent activity look overly negative. The West Coast and upper North Island areas including Northland, Auckland, and Waikato were some of the stronger preforming regional economies in the June 2022 quarter.

“Underlying economic activity has picked up since the earlier peak in Omicron cases in March, as New Zealand moved to Orange and spending activity rebounded,” says Infometrics Principal Economist and Director Brad Olsen. “But capacity constraints around finding enough labour and materials have prevented regional economies from growing even further.”

Growth in filled jobs across New Zealand has been more restrained in recent months, despite job ad numbers and underlying demand for workers remaining high. “A tight labour market provides a strong foundation for regional economies but is also piling the pressure on, as short-term sickness and a continued brain drain of young talent make it hard to resource current levels of business,” says Mr Olsen.

“Around half the current net migration outflow from New Zealand is young people, presenting a key constraint on provincial economies, which are struggling to source the talent needed.”

Card spending across the country has risen further, but high inflation and rising interest rates are weighing on household sentiment and undermining spending growth. “Although spending levels are up from a year earlier, high inflation means Kiwis are getting less bang for their buck. Infometrics estimates suggest around 40% of recent increases in spending are due to inflation rather than real growth in spending volumes,” says Mr Olsen.

Overall tourism activity in the June 2022 quarter was weaker despite the border starting to reopen, with a 6.9%pa drop in guest nights across the country. International visitor guest nights showed early signs of recovery (up 15%pa) in the June 2022 quarter, but domestic visitor guest nights were 8.7%pa lower than in 2021. Domestic travel was reduced as inflation hit family budgets, and the number of Kiwis holidaying overseas outnumbered the increase in foreigners travelling to New Zealand. After a strong run of domestic tourism supporting regional economic activity, the recent pull-back has contributed to a softening in regional economies.

The path ahead for regional economies remains uncertain, with New Zealand facing a range of negative influences including weak confidence, high inflation, rising interest rates, a tight labour market, and ongoing supply chain disruptions. However, these negatives will be mitigated by the border reopening, reduced Covid case numbers, and less restrictive trading conditions outside Red. In the case of regions where international tourism was a highly important part of their economy, the offsetting positive effects of the border reopening could be considerable over the next few quarters.