14 Dec 2022

Otago expected to fare best amid economic growth slowdown - Westpac report

7:27 am on 14 December 2022
Wanaka, New Zealand

Otago is expected to outperform other regions in economic growth over the year ahead, Westpac says. (file picture) Photo: RNZ / Rebekah Parsons-King

Increasing interest rates are expected to slow economic growth in every region of the country, as household spending and residential building activity begins to slow.

Westpac's regional report indicated those regions with a high exposure to export markets, particularly agriculture, horticulture and foreign tourism, would generally do better than others.

"To that end, we think that Otago will outperform all others over the year ahead," bank industry economist Paul Clark said.

"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."

Agricultural regions, dominated by meat and dairy farms, continued to do well, even with prices down from earlier highs.

"However, for those dependent on horticulture the picture is less assured," Clark said, but were expected to improve subject to weather and adequate labour market conditions.

The housing market slowdown was affecting all regions, he said.

"Nowhere, is that more evident than in Auckland and Wellington, which still have the worst performing housing markets in the country," he said.

"Declines elsewhere have also been substantial, but mostly concentrated in urban provincial centres rather than rural districts."

The downturn had flowed through to a softening in building consents, while actual building activity continued to play catchup with the backlog built up through Covid-19 lockdowns, he said.

However, construction activity was also expected to slow, once the current backlogs were addressed.

"That in turn will have negative knock-on effects for regional manufacturing and employment in places like Auckland and Canterbury," Clark said.

"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."

Despite the prospect of higher inflation, interest rates and a recession, household spending remained strong and was tracking higher.

"A lot of that has to do with rising prices," Clark said.

"For most regions, spending volumes have at best tracked sideways, with several reporting a drop off," he said.

"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."

However, Clark said ongoing increases in living costs and falling house prices would 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," Clark said, adding Auckland topped that list, followed by Manawatū.

"We would also keep Wellington on that list because it has already experienced a significant loss of household wealth due to falling house prices."

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