Waikato Economic Report 2009
Report: TR 2009/26
Author: Yvonne Phillips (Matthews)
Abstract
This report examines the drivers that have shaped of the Waikato economy –geography, history, natural resources and wider events such as globalisation. It provides a summary of the key economic statistics from the 2004 to 2007. By looking at the current drivers and likely future influences, an analysis of the future of the Waikato economy is drawn.
The Waikato economy is tied to global influences on international and sub-national economies. New Zealand is consistently ranked as one of the world’s most liberalised economies and the second best country in the world for doing business (Porter et al, 2007). However, even with good macroeconomic and institutional characteristics, the New Zealand economy, GDP and productivity growth continues to be below the Organisation for Economic Co-operation and Development (OECD) average (NZIER, 2006). The three dimensions of globalisation – density, distance, and division provide insight into the drivers of modern economies, and how these affect New Zealand and the Waikato.
The advantages of economic density for businesses and people include: the sharing of infrastructure, greater variety and specialisation in goods, services and employment and a range of mechanisms that enhance knowledge generation and diffusion. The Auckland region is New Zealand’s largest and most globally connected urban area exerting a significant pull on firms and labour to migrate to the city. On a smaller scale, the Hamilton urban area provides these benefits for the Waikato region.
Distance from economic density remains vitally important to a region’s prosperity. At a sub-national scale, effective distance is important, which takes into account the cost and speed of transporting goods, people and information between regions. Effective distance can be reduced by improving transport and communications infrastructure and reducing congestion. Good links to other regions and international trading partners are therefore vital to the prosperity of the Waikato region.
Economic division occurs when effective distance is increased by anything that impedes the flow of goods, services, capital or migration. International barriers to trade and investment are low in New Zealand, although agricultural exports are still restricted by tariffs and quotas imposed by receiving countries. At a sub-national level there can also be cultural and socio-economic divisions which reduce the social inclusion of some groups within the population.
The New Zealand domestic market suffers from the “branch economy” problem due to its small size, lacking high-value economic activity such as corporate leadership. The Waikato regional economy is subject to the same issues; how to attract and retain high-value economic activity in an era of increasing human and capital mobility.
The Waikato region is the fourth largest regional economy in New Zealand, contributing 9.1 per cent of GDP and 10 per cent of New Zealand’s exports. The Waikato economy grew 5 per cent per year (inflation-adjusted) between 2004 and 2007, above the national average of 3.2 per cent.
The largest sectors, by value added to the Waikato economy in 2007, were dairy cattle farming ($1,412 million), business services ($1,243 million), and real estate ($931 million). The sectors which grew the most between 2004 and 2007 (in real terms) were real estate (89 per cent), dairy product manufacturing (80 per cent), and business services (48 per cent). Total international exports from the Waikato region were valued at 3.7 billion dollars in 2007, 10 per cent of the national total.
The are 395,000 residents in the Waikato region, 9.4 per cent of New Zealand’s total population. The Waikato region is part of the “Golden Triangle” of population and economic growth, an area stretching from Auckland to the Bay of Plenty. Net migration gain over the period 2001 to 2006 was 6,117 people. A third came from the Auckland region, 13 per cent from Bay of Plenty, 15 per cent from the lower North Island, and 6 per cent from the South Island. A third arrived from overseas; the majority from Australia.
The total employment count in the Waikato region for the year ended March 2007 was 167,400. In addition, there were 29,700 working proprietors. Retail trade had the highest contribution to the Waikato labour force employing 12 per cent, while business services employed 10 per cent. Dairy cattle farming was the sixth largest employment sector, employing 6 per cent or 11,700 people (including working proprietors). When the dairy manufacturing sector is included, the proportion increases to 7.3 per cent (14,400 people).
Average labour productivity was $79,000 per employee, higher than national average of $70,000 in the year ended March 2007. In 2009, the median weekly household income was $1228, slightly lower than the national median of $1234. The Waikato unemployment rate was 2.9 per cent in 2007, but increased to 6.8 per cent in June 2009, higher than the national unemployment rate of 5 per cent.
Looking to the future there are several national and international factors which are expected to have a major influence on the future of the Waikato economy. These are the global economic recovery, free trade negotiations, and environmental issues.
Economic indicators published in the second half of 2009 show an improving national and international outlook. The Waikato region is in a good position because demand for New Zealand commodity exports remains strong, particularly in China. However, the relatively high exchange rate will dampen returns. Income growth may also be constrained by slow wage growth and relatively high unemployment, which is expected to peak in 2010 (Treasury, 2009).
Current and future free trade agreements are expected to benefit Waikato exporters and linked industries, and households who will face lower costs for imported consumer goods. However, Waikato businesses will face increased international competition, and it is difficult to achieve significant economies of scale in a small economy. Closer economic linkages with the new international market hub in Southeast Asia may provide economic opportunities. Improving linkages and reducing transport costs to and from Auckland and Tauranga ports are therefore important.
International and domestic consumer demand for food and fibre produced by environmentally friendly systems is growing. The Waikato economy produces negative externalities such as water pollution, soil contamination, and atmospheric emissions which have a detrimental effect on both the local and global environment. For the most part, neither producers nor consumers are currently paying the full cost of production.
However, a tightening of the environmental policy regime is evident at the national level with the introduction of an Emissions Trading Scheme (ETS) and the proposed National Freshwater Policy Statement, and at the local level, for example by the Waikato Regional Plan proposed ‘Variation No. 5’ for Lake Taupo and the Waikato-Tainui River Settlement and subsequent Vision and Strategy for the Waikato river – Te Ture Whaimana. This indicates greater account of environmental externalities. It remains to be seen whether recent Waikato economic growth rates will be sustainable in the long term.