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All regions in New Zealand will see slower economic growth in the year ahead, as higher interest rates squeeze household spending power and residential building activity starts to slow. Those regions with a high exposure to export markets, particularly agriculture/horticulture and foreign tourism, will generally fare better than those that don’t. To that end, we think that Otago will outperform all others over the year ahead.

Despite ongoing uncertainties, economic activity in most regions has been reasonably strong. A lot of that has to do with the removal of Covid restrictions, including those at the border, which had starved the country of foreign tourists. Indeed, tourism heavy Otago has probably been the most improved region in the country over this year, although admittedly that has come off a low base.

Regions with a large rural backbone, dominated by meat and dairy, continue to do well, even with prices having come off from earlier highs. However, for those dependent on horticulture the picture is less assured. Some regions like those on the top of the South Island have done well. Others closer to the top of the North Island, such as the Bay of Plenty and Gisborne/Hawke’s Bay, have struggled in the face of adverse weather conditions and acute labour shortages.

All regions have seen a slowdown in the housing market, with house prices falling and sales volumes continuing to track lower. Nowhere is that more evident than in Auckland and Wellington, which still have the worst performing housing markets in the country. Declines elsewhere have also been substantial, but mostly concentrated in urban provincial centres rather than rural districts.

That in turn has contributed to a softening in consent issuance, although they remain at elevated levels for most regions. Actual building activity though has been strong, with builders continuing to work through backlogs caused by Covid.

Household spending has also been strong and continues to track higher. A lot of that has to do with rising prices. For most regions spending volumes have at best tracked sideways, with several reporting a drop off. It is not clear to what extent this reflects the effect of falling house prices, although we note that nominal retail spending has increased more in regions like Otago and Northland, where house prices have generally performed better.

Looking forward, we expect all regions in New Zealand will see slower economic growth over the coming year.

Regions that depend on agriculture/horticulture or rely heavily on tourism are expected to outperform those that do not. For that reason, we are picking Otago to be our top performing region over the coming year, with Southland and Northland following close behind. To be clear, economic activity in these regions is still expected to slow, but not quite as much as in other regions.

This weaker outlook reflects the impact of higher debt servicing costs on household spending with an increasing proportion of mortgage holders expected to refix at much higher interest rates over the coming year. Ongoing increases in living costs and falling house prices will further squeeze spending power in every region.

Worst affected will be regions that have a higher proportion of interest rate sensitive investors or who previously might have recorded big house price gains off small volumes. Auckland tops that list followed by the Manawatu. We would also keep Wellington on that list because it has already experienced a significant loss of household wealth due to falling house prices.

Construction activity is also expected to be less supportive. With consents issuance already on the slide in many regions, we think that building activity will slow once current backlogs have been addressed. That in turn will have negative knock-on effects for regional manufacturing and employment in places like Auckland and Canterbury. Forestry regions such as the Bay of Plenty and Gisborne may also be impacted, although their fortunes will increasingly be tied to a recovery in China.

Paul Clark

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