Source: Auckland Council
Prior to COVID-19’s severe impact on the New Zealand economy, Auckland enjoyed GDP growth in the 2 per cent range and a 4.2 per cent unemployment rate, the lowest in a decade. New Zealand’s domestic outlook was solid. Reflecting this, house prices in Auckland were up 11 per cent in a year and retail trade growth was strong.
Just two months later, the world economy and day-to-day life were brought to their knees by the global pandemic.
The Government’s health officials have done an excellent job at containing the virus here, but the limits on business activity during Alert Levels 4 and 3 have led to a dramatic slowdown in economic activity.
One of the biggest challenges will be confidence to start spending and investing again, particularly in industries with an overseas orientation.
We expect the recovery to be relatively sharp in Auckland although not as sharp as the decline, with obvious ongoing weakness in international tourism despite a likely travel agreement with ‘trusted nations’.
Essential to driving that recovery will be building back confidence.
First, confidence that the health risks have abated so people don’t fear hopping on the bus or train, sitting down in a restaurant, or sending their kids to school. Second, confidence that the economy is on the up and that we can start opening our wallets again, investing in a home or new vehicle, plant or machinery, or just a discretionary restaurant meal.
Weak economic confidence will linger. Central and local government stimulus will help. Reserve Bank liquidity and relaxed loan-to-value restrictions will help. But it is important that we lead the way by catalysing other economic activity by investing in projects that provide good long-term social and environmental benefits while meeting shorter-term financial needs.
Churn in employment will be significant as many businesses will disappear altogether. This means that employment will not recover nearly as fast as it has declined. But the government’s additional stimulus will help and the unemployment rate will likely be around 7 per cent by the end of 2021.
Getting shovel ready
Building more infrastructure will play a vital role in our economic recovery. First, good infrastructure decisions enable other economic activity. New pipes allow more housing development and town centre regeneration encourages more people into their local retail community. Second, not all infrastructure projects require highly skilled workers. There will be some opportunities for workers in hard-hit sectors like tourism to retrain.
But there will be limits to how many can switch. Infrastructure projects also take a long time to plan, get approved and start building. This means other than projects that were already underway or about to begin when the lockdown began, we’re unlikely to see an immediate surge.
For some other industries or businesses, the writing was on the wall before the pandemic, and it simply accelerated their decline. This includes many traditional retailers who can’t compete with online trade, or print media competing with an endless array of online content.
For others, the pandemic will spark or expand a revolution. One of these is transport and logistics.
By the end of August, we expect we’ll have a clearer picture of the economic damage and the new “right” price level for housing as the market takes its time to re-establish and banks re-evaluate. House prices will fall, but not as much as some suggest. Probably in the 5-7 per cent range (seasonally adjusted from the April 2020 peak) by the time the mortgage holidays end in October or November.
This uncertainty in prices will affect development activity. In non-residential development, we were already tapering off pre-covid-19. This pattern will continue as developers assess demand for space with higher unemployment and perhaps greater willingness to allow more flexible working among office-dwellers.
Learning the lesson of trade-offs
As individuals, cities and countries, we face hundreds of competing needs at any one time with limited resources, and always we should be trying to do two things.
First, we need to value costs and benefits of each decision as accurately as we can.
Second, we must get away from a single-agenda mindset. We have always made, and must continue to make, trade-offs with our limited natural, human, financial and social capital that aims for the maximum wellbeing for all our people here today and those who will be born tomorrow.
For more, read the latest Auckland Economic Quarterly Report
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