Regional Impacts of the Global Financial Crisis: the New Zealand Example

Economic blip or structural flip – cyclical downturn or sea change?

Business cycle, downturn, recession, L-shape, double dip – it doesn’t matter how we describe it, economies the world over are in trouble.  Capitalism has a habit of doing this, long periods of more or less continuous growth followed by a major shake out.  Call it a Kondratiev wave, creative destruction, deep downturn, global correction, bubble bursting, whatever; right now are in the middle of a major economic adjustment.

Out of such moments capitalism has a habit of reinventing itself.  From the turmoil, deprivation, and conflict, a new path emerges, a major structural adjustment potentially very different from what went before.  Relationships among industries, institutions, countries, and regions change.  Economic influence and political power shift; governments start doing things differently. 

So what comes next in the global economy?

There are no easy answers to this question.

Perhaps we are moving on path away from oil dependence which will change the way we all live.  Maybe we are seeing the beginning of the end of American hegemony, the sun rising in the east as it sets in the west.

The current crunch could lead to greater interdependence as trans-national governance becomes more pervasive.  Or we could see the opposite: an unravelling of existing economic blocs.  (This is the dilemma facing the EC as it struggles with distortions created by currency union: how far can it risk economic collapse to achieve greater political unity in the fight against fiscal contagion?)

Perhaps the boundary between public and private sectors will blur further – the Chinese and Singaporean versions of mixed economies have stood up to the GFC so far.  Western governments are still experimenting with public-private models of service delivery.  Or, maybe governments will again temper their ambitions to control economies, allowing the balance to shift further towards market regulation.

And what can we say about regional outcomes?

Given the range of possibilities and complexity governments face, we can only guess at what might happen to the distribution of activity within nations.

On the face of it, economies seem likely to consolidate and activity concentrate geographically.

On the business front, the weaker firms that fail under tough conditions tend to be located in lower order centres.  And rarely do head offices take voluntary redundancy before trimming regional operations, selling or merging them, or closing branches.

In government, public sector cuts happen in the regions rather than at the centre where institutional power and decision-making sit. [1]

At the same time drift of the unemployed and new entrants in tight labour markets might favour larger centres as people move in search of work, training, and education.

There may be decentralising influences, though.  Large cities may be too expensive to live or do business in.  Lower cost housing and opportunities for a self-sufficient lifestyle may make smaller centres more appealing.  Slowing migration might reduce the gains of major urban destinations.

Some New Zealand Evidence

The Global Financial Crisis took hold in 2007.  I have looked at a labour market and construction indicators in New Zealand since to assess its impact on regional performance. 

This is an interim exercise, looking at short-term changes at the margin.  It may be some time before we understand the full spatial consequences of the GFC.  Nevertheless, it may have already impacted on regional indicators, giving clues about how this recession will affect our economic geography in the long run. 

The box below outlines the regionalisation used for this purpose.  More about New Zealand’s regional population growth is contained in an earlier posting.

1.       Auckland –the dominant commercial and population centre;

2.       Wellington – the capital city in a highly urbanised region;

3.       Canterbury – containing Christchurch the largest South Island city and several rapidly growing small settlements in a prosperous hinterland;

4.       The Northern North Island (NNI) excluding Auckland –  including fast growing secondary cities and extensive horticulture, agriculture, and forestry;

5.       The Southern North Island (SNI) excluding Wellington –six slower growing provincial cities, small towns, and extensive farming and forestry;

6.       Otago, a small stable provincial city (Dunedin) and growing resort area (Queenstown), plus horticulture, viticulture, and high country farming;

7.       The Rest of the South Island (RSI) – generally sparsely populated with small service centres.

If recession leads to consolidation, Auckland, Wellington, and Canterbury should experience more growth (or less decline) than the rest of the country.  (In Canterbury, though, the earthquakes of the past year will distort trends).

The labour market

National employment peaked in December 2007 and has eased slightly since.  Consequently, 3.2% growth in the workforce since has been absorbed by unemployment, not employment.  Wellington shows this: the workforce was up 8,000 in June quarter 2011 compared with 2007, but unemployment was up 10,000.

Labour market Indicators, December 2007-June 2011

	Employ-ment	Unemploy-ment	Labour Force	Partici-pation
Auckland	-1.1%	108.2%	2.8%	-1.3%
Wellington	-0.6%	184.3%	4.1%	-0.5%
Canterbury	-3.4%	120.0%	-0.1%	-2.5%
Rest Northern NI	-1.2%	103.6%	2.4%	-1.2%
Rest Southern SI	-4.0%	40.4%	-2.0%	-1.0%
Otago	32.7%	137.9%	35.9%	2.7%
Rest South Island	0.1%	134.6%	2.4%	-0.9%
New Zealand	-0.3%	105.6%	3.2%	-1.1%

Source: Quarterly Employment Survey, Statistics New Zealand

The only exception was Otago.  Here, in the lower South Island,  the momentum of a lifestyle and tourist boom maintained some economic momentum.

The distribution of investment

The following charts use building consent data to show where new investment has taken place.

Housing

The area of housing consented in YE June 2011 was just half that consented in 2007.  Auckland’s share of the market dropped from 31% to 24% in 2009, although recovered to 27% in 2011.  But this was in a sharp downturn; new housing consented in Auckland in 2011 was just 45% of the 2005 figure.  Even though the pain is widespread, Auckland has clearly  led the way down.

Office, administration and public services

Office and public service building also fell sharply, although that happened later (2009-2010). The area consented nationally in 2011 was down 36% on 2007.  Again, the main centres lost share even as the market fell; Auckland at 33% (down from 42% in 2007) and Wellington at 9% (24% in 2007).

Industry

Much the same goes for industrial building.  Nationally, the area consented in 2011 was 58% of the 2007 figure.  Auckland’s share dropped from 32% to 26%.  The RNI, which had previously picked up much of Auckland’s overspill, fell from 27% to 25%, offset by bigger shares in the SNI and Wellington.  All this happened, though, in a sharply contracting market.

Too early to tell?

It seems that the forces of decentralisation have prevailed as employment growth falters and investment in housing, industry and commerce falls.  Most of the country is suffering, but areas with resource and perhaps production cost advantages seem to have done better than the main centres.  They may be where the best prospects for grass roots recovery lie.

This may change of course, as the government’s preoccupation with Auckland as the driver of the national economy has ramped up (although its strategy of major investments there may be undermined by suddenly urgent demands for spending on recovery and rebuilding in Canterbury).

But it must be asked whether a strategy that concentrates economic initiatives in dominant centres will be appropriate for any new economic order that might emerge from the GFC. 

Might we be looking instead at more dispersed or distributed forms of development internationally and regionally than currently assumed?  This possibility is suggested by the figures to date, which belie expectations of further concentration.  Or is all that they really show that in  today's world there are few certainties about the future shape of the spatial economy?

[1]        The recent streamlining of the tax office in New Zealand promise more of the same, with through two tranches of job cuts focused on the regions. This was justified by the Minister because “back room functions don’t need to be performed there”.  

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A region stalled - is consumption the problem?

So what makes Auckland tick?

For some time Auckland has been seen as a problem economy.

To find out why I looked at some 20 studies of Auckland’s economy prepared between 2004 and 2010.  They were pretty repetitive, some just building on what others had already said.  The following themes pretty well cover the analyses and prognoses they offered:

(1)    Too much has been invested in consumption-focused activity and not enough in export industries;

(2)    Insufficient innovation to drive productivity, create competitive advantage, and grow exports;

(3)    There is a need to keep costs low to attract investment and maintain competitiveness;

(4)    Good connectivity (transport and communications) is needed to enable firms to work together    well and to do international business effectively;

(5)    As a high density urban area Auckland should be able to make productivity gains, lower costs, and lift connectivity;

(6)    An attractive living environment will attract and keep the people needed to make things happen.

A high density city is not the answer

In previous postings I pointed out that in employment terms Auckland has lagged over the past decade, with the rest of New Zealand growing slightly faster.  Actually Auckland led the way after 2007 – but in the wrong direction.  Auckland's  employment fell by 2.8% and the rest of New Zealand by 1.6%. 

Not only that, but when we review individual sectors it appears that concentration in Auckland was more likely to be a disadvantage than an advantage.  

That finding seems to knock out theme number (5) in the list above, that there are automatically advantages in the concentration of firms and in a larger, higher density environment. Maybe there are some gains to firms in a sector clustered in the region. Perhaps the density of activity in Auckland offers “urbanisation advantages” – more opportunities to conduct exchange at lower costs.  But if so, these things do not show up in aggregate performance. 

So, theoretical agglomeration economies must be offset by actual diseconomies -- the reality of the high cost of investing and operating in Auckland.  With the government pinning its hopes for economic recovery on the performance on the region, this has got to be a worry.

We need to look again at how to explain Auckland’s performance, and how we might promote it. In this posting I make a start by considering changes in economic structure, item number (1).

The wrong structure?

If over-dependence on consumption has been the problem, this will show up in the changing mix of activities in the region.

To explore this I grouped employment into major sectors in the table below and looked at each sector's growth over the decade, in two parts.  The first seven years saw almost unparalleled growth internationally.  The last three years were sent reeling by the Global Financial Crisis (GFC). 

The numbers come from the Statistics New Zealand February employment counts. They tell an interesting story.

Production of goods on the downward slope

First, manufacturing was definitely on the soft side for the first seven years. This set it up for an outright tumble with the onset of the GFC. When we look at the detail, only the food and beverage sectors made any significant progress at all over the whole period. Machinery and equipment manufacturing just held its ground.  But the whole lot contracted – even these favoured subsectors  – from 2007 to 2009.

The other "industrial" activities – transport and storage, construction, and utilities – fared better early on, but joined the tumble in later.

Business services hit the wall

Second, the big player in the first part of the decade – business and support services, which grew by 37% in seven years – also hit the wall in the second part, giving back 15% of the job gain .  Not surprisingly, financial, administrative and real estate services took the biggest hit. Overall, this sector accounted for a third of the region’s gain between 2000 and 2007 and then a third of its loss between 2007 and 2010. 

Consumer services stall

Third, consumer-oriented services – retailing, accommodation, cafes, bars and restaurants – were certainly significant, but they still accounted for only 19% of Auckland’s total employment in 2010. And given that the region’s population grew by around 22% over the decade, a final gain of 16% in these activities (following a decline late in the piece) does not seem out of line. Cultural, recreation and personal services did grow faster than population, but are much less significant overall. They accounted for just 6% of regional employment in 2010.

Of course, a large share of employment in the industrial and business service sectors also depends on household demand but then those sectors – especially the industrial sector – grew only modestly in any case.  On the face of it, over-consumption has not been the problem - but under-production may have been. (I have not looked at the housing sector here, though.  That needs separate analysis).

Public services rumble onward and upward

Fourth, and most significantly, the public services sector – hospitals and health, education, law and order, social assistance, and government administration – had by far the most growth.  It was the only major sector to grow after 2007.  By 2010 public services accounted for over 23% of Auckland’s employment. 

It can be expected that this is related to an expanding population .  Interestingly, though, 45% growth in public services employment is over double population growth of 22%. 

Actually, on this score Auckland’s ratios do not stack up quite as badly as elsewhere. Over the rest of New Zealand public services grew by 27%, three times the rate of population at 9%.

Not surprisingly, Wellington led the way.  With 10% population growth between 2000 and 2010 it experienced 35% growth in employment in public services, including a spectacular 53% gain in public administration.

This raises some hard questions.  Has demand for public services grown by that much?  Have any productivity gains been made in public services?  And given that it was the only sector to actually grow during the GFC, where might recovery come from, other than from services funded primarily by current and, increasingly, future taxpayers?

So what is the prognosis?

Final demand – consumption – indeed dominated Auckland’s growth over the past decade, but only when we lump public servcies in with the traditional markers – retailing, catering, and entertainment.  The real issues this analysis raises are:

1.       The production of goods and services – industry – has completely underperformed.  We really do need to focus on how we can turn this around.
2.      The main growth sector, business services, is now looking shaky. Let's hope that some sound performers survive and emerge from the current shakedown of a sector that maybe just got too big for its boots.
3.      The GFC has revealed an unhealthy overdependence on public services.  THere is a need to address productivityn issues here, including the quality of decision-making and resource allocation throughout the public sector.

So crowding out of productive investment and employment by a focus on consumption my not have been the issue. Rather, a failure to grow our income earning sectors and consequent reliace on an explding public services sector is a concern, one that simply chopping the number of civil servants in local government may not resolve. 

It’s not that the expansion of public services is a bad thing if it contributes to the well-being of the community and lifts economic productivity.  But the fact that it has been the only source of significant employment growth over the last three years suggests a weakness in the private sector and signals a region still over-dependent on taking in its own washing to sustain itself – or, if we want to mix metaphors, bootstrapping without the boots.