CTU Economic Bulletin No. 82
July 2007
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Comment
There has been much comment lately on exchange rates. In particular there has been a focus on the exchange rate between the NZ and US dollar which went up 30% in the last year only to fall back somewhat in recent days. Against a basket of currencies the NZ dollar appreciated by 18% in the last year. Much of what drives these exchange rates is trends in other economies. But there is a margin that is driven by what is happening here. A high dollar can reflect underlying strength in the economy so in many ways is a good sign. But the concern is when a high NZ dollar is due in part to currency speculation attracted by high interest rates. There is over $120 trillion worth of hot money surging around the globe day and night looking for the best return. And Warren Buffet reputedly has made $100 million speculating on the NZ dollar. High interest rates impact on the cost of capital and to that extent slows down investment in plant, machinery and technology. But a high dollar has a variable impact on (for example) manufacturers depending on where they source their raw materials and any intermediate goods, what currency they sell their products in and so on. When there is a high dollar a manufacturer will often face more competition from cheap imports in the domestic market as well as lower returns from exports. Most forecasts were for a NZ dollar at 65 US cents at this time. Instead it reached 81 cents last week. As well as cyclical effects from a high dollar there can also be a longer term impact. It appears that the NZ dollar settles at a higher level at the bottom of each cycle – as do interest rates. And once manufacturers relocate, or close down, or pull out of a foreign market, it is that much harder to reverse these moves once the dollar falls. This creates a structural bias against manufacturing exports. Inevitably much of the frustration is directed at the operation of monetary policy. Twenty years ago this month, the inflation rate was 18.9%. Today it is 2%. But you would think we had a major crisis with domestic inflation the way some economists talk. With the most recent increase, we were told to ignore the annual rate (which was half the level of the previous year) and look instead at the quarterly rate of 1%. Sure the latest quarter is an indication of current pressures as is the case in Australia also. But just as an 8.4% fall in petrol prices had a downward effect on the annual rate, so did an 8% increase in petrol prices have an upward effect on the quarterly rate. And if monetary policy consistently looked at the underlying quarterly rate, then at least we would know where we stand. But is sometimes seems as if those advocating a lift in the OCR search around for whatever statistic supports their argument. When the quarterly change in CPI late last year was a fall of 0.2%, I don’t recall economists warning about deflation. In fact many were calling for a lift in the OCR. And as for an overheated economy, our latest GDP growth rate for the year was 1.7%. Inflation is not good for workers. It erodes the value of their pay packet. I well remember times when even a 7% wage increase still meant a drop in real wages for that year. But in the process of getting inflation down to a very low level, monetary policy does huge damage to the tradable sector. It also puts a huge cost on to workers trying to pay off a mortgage. The CPI does not include interest rates. This is for the obvious reason that if it did, a rise in the official cash rate intending to reduce inflation would also increase the official measure of inflation and monetary policy would therefore be chasing its tail. But in these times this means that the huge impact of interest rate increases on the cost of living is not captured by the CPI. As many now recognise, one of the key issues is house price inflation. That is why CTU submissions to both the Commerce Committee inquiry into home affordability and the Finance and Expenditure Committee inquiry into future monetary policy zeroed in on a range of measures to address the housing sector. These include supply side measures, direct assistance to help make homes affordable, and also various forms of tax changes particularly on investment housing. Any of these measures will have a downside. But that needs to be compared with the disadvantages we face now with the current impact of house prices and a high dollar. Our submissions also looked at the operation of monetary policy. John Edwards from HSBC has been commenting on the different approaches between NZ and Australia. He said recently1 that the "RBNZ style is quite different from its Australian cousin." And as if to emphasise the degree of estimation involved in output gap models, he goes on to say that the operating procedure used by the RBNZ "requires the central bank to estimate the output growth over the next year or eighteen months, to estimate the relationship between expected output growth and the estimated supply capacity of the economy, and then to estimate the impact on price inflation of the estimated gap between estimated output and estimated capacity". Whew! He also notes that in contrast the RBA (Reserve Bank of Australia) gives greater weight to the judgment and experience of its officials than the output of models. This means that the RBA by putting more emphasis on an analysis of current core inflation is better placed to interpret changing factors – such as declining core inflation despite rising employment and historically low unemployment. Facing similar inflation pressures, Australian interest rates are 2% lower than here (with a small rise imminent). So action is needed on a number of fronts – some new measures and tools to address house price inflation, a bit less obsession about inflation, and some changes in the way monetary policy is practiced in New Zealand would be a good start.
Consensus forecasts2 published by NZIER
The consensus forecasts were updated in June 2007. 2007 2008 2009 1.8 2.5 2.4 2.5 2.5 2.6 5.3 4.4 3.9 1.7 0.8 1.2 3.8 4.1 4.3
March Year (%)
GDP
CPI
Wages (QES)
Employment
Unemployment
Economic Snapshot
Consumer prices rose 1.0% in the June 2007 quarter, and were up by 2.0% annually. The next CPI update is on 15th October. Food prices rose 3.0% in the June 2007 year. Unemployment is at 3.8%. Maori unemployment is 8.6% and Pacific peoples’ unemployment is at 8.0%, compared with 2.9% for European/Pakeha. The minimum wage is $11.25 an hour for a person who is aged 18 or over and $9.00 an hour for those aged 16 or 17 years old or a trainee. Ordinary time wages, as measured by the Quarterly Employment Survey (QES) for March 2007, were up annually by 4.6% (5.5% in the private sector and 1.9% in the public sector). The QES showed that the average ordinary time hourly wage is now $22.59 ($21.03 in the private sector and $29.00 in the public sector). The female rate of $20.84 is 86.8% of the male rate which is $24.02. The Labour Cost Index (LCI) shows that ordinary time wages went up by 3.2% in the March 2007 year (3.0% in the private sector and 3.7% in the public sector). For those workers who actually got an increase, the average increase for the year was 5.4% and the median was 4.1%. The next update of wages data is on 6th August, 2007. Economic activity increased 1.0% in the March 2007 quarter. In the year ended March 2007, the economy grew 1.7%, compared with 2.0% in the year ended March 2006. The Official Cash Rate (OCR) is 8.25%.
Consumer Price Index
The Consumers Price Index (CPI) rose 1.0% in the June 2007 quarter, and 2.0% in the year since June 2006. For the June quarter the main drivers of the 1% increase were petrol prices up 8%, housing and household utilities up 1.3% which included electricity up 3% and new housing up 1.6%. For the year, the main drivers of the 2% annual increase were housing and household utilities up 5.2% and food up 4.1% whereas the transport group showed a decline of 3% with petrol prices down 8.4%. In terms of quarterly CPI, the increase of 1.0% would have been 0.6% if it were not for petrol price increases. This means that core inflation factoring out the volatility of petrol prices is running at more like 2.4%.
Retail Sales
Seasonally adjusted total retail sales rose 1.2% in May 2007, strongly influenced by rises in the two largest retail industries, supermarket and grocery stores and motor vehicle retailing. Excluding the vehicle-related industries, retail sales rose 0.8% in May 2007. The trend for total retail sales has been increasing since May 1998, with an average monthly increase of 0.5%. Annual sales are up by 6.5%.
Trade
Export values were down by 7.5% in June compared with June 2006. There was however an 18% lift in exchange rates during the year. The monthly deficit was above expectations at $524 million and is the highest deficit for a June month. Seasonally adjusted exports were down 3.8% and imports were down 1.7%, compared with the March 2007 quarter. The drop in exports was mainly due to a fall in meat and dairy exports. The decline in seasonally adjusted imports follows ten consecutive quarterly increases. However, imports were up 3.5% on June 2006 to $3,275 million, the highest value recorded for a June month. The annual trade deficit was $6.23 billion.
Property
The REINZ national median price fell from $350,000 in May to $347,500 in June. But Quotable Value reported a lift in property values of 12.2% comparing the calculated over the three months ending June 2007 in comparison to the same period last year. The average New Zealand sale price was $378,672 for this period. However, permits for new housing were 29% higher in June 2007 compared with June last year. A good deal of that increase was from consents for new apartments. The national farm median price was up from $1,225,000 to $1,250,000 for the three months to June.
Firm size and employment
The latest update on firm size shows that SMEs (employing fewer than 20 workers) accounted for 29.6% of total employment at February 2006. This was an increase of 4% on the year before. Firms with 5 or fewer employees accounted for 11% of all employees, and from 2001 to 2006, SMEs accounted for 59% of all new net jobs in the economy. The total number of enterprises rose by 3.5% from 334,340 in February 2005 to 346,091 in February 2006. As at February 2006, 96.4% of enterprises employed 19 or fewer people, 86.8% of enterprises employed 5 or fewer people. But 63.6% of enterprises had no employees. This puts the figures into perspective. Also it means that 70.4% of the jobs are in just 3.6% of the firms.
Work Stoppages
40 work stoppages ended in the March 2007 year, compared with 66 stoppages for the March 2006 year. Of the 40 stoppages, 15 were in manufacturing, 9 in health and community services, 3 in construction and 13 in all other industries combined.
Government Accounts
Figures for the eleven months ending June 2007 show an operating surplus of $7.2 billion, $600 million ahead of expectations. The main contributors to this increase were the better than expected investment returns from the super fund, and a higher tax take. The OBERAC (Operating Balance Excluding Revaluations and Accounting Changes) stood at $6.81 billion and was $201 million more than expected. The cash surplus was $2.27 billion.
Unemployment
The number of 18 and 19 year-olds receiving the unemployment benefit in 1999 was 17,514. In July this year it has fallen to 990.
Migration
In the year ended June 2007, there were 82,700 arrivals, up 2,600 (3%) on the June 2006 year and 72,600 departures, up 3,200 (5%). As a result, net migration was 10,100 in the June 2007 year. There was a net inflow of 9,400 from the United Kingdom, below the net inflow of 10,500 recorded in the June 2006 year. The Philippines was the second largest source of net migration to New Zealand in the June 2007 year, increasing from a net inflow of 600 in 2005, to 1,300 in 2006, and 3,100 in 2007. There were also net inflows from India (2,800) and Fiji (2,400) in the June 2007 year. The net outflow to Australia was 25,000 in the June 2007 year, compared with 20,500 in the June 2006 year. The highest June year net outflow to Australia in the past decade was 31,000 in 2001. New Zealand residents departed on 208,300 short-term trips in June 2007, up 20,500 (11%) on the 187,800 departures in June 2006; a record number of departures for any month.
Inequality now compared with 1984
A recent report from the Ministry of Social Development shows that after rating New Zealand households in New Zealand by income, the bottom 30% in 2004 were worse off than the bottom 30% in 1984 had been. By contrast, the top 10% were at least 21% better off in 2004 than in 1984, and the top 20% at least 16% better off. New Zealand’s rate of inequality is also higher than the OECD average and the speed at which it has increased since the mid 1980’s is the highest of the 20 countries that we are compared with, and more than three times that of Canada, Australia or the United States.
World rich 'keep getting richer'
Merrill Lynch and Capgemini, recently announced that in 2006 the total wealth of high-net worth individuals rose 11.4% to $US37.2 trillion. There were 9.5 million people with assets of more than $US1 million, while the number of super-rich, with assets in excess of $30 million, was 94,970.
Industrial & Commercial Bank of China now world’s largest bank
On July 23, a leap in the shares of the ICBC made it the world's biggest bank, overtaking U.S. giant Citigroup. ICBC reported income of $24 billion last year. For further information contact Peter Conway on 04 802 3816 or peterc@nzctu.org.nz
Notes
1 HSBC. "Australia and New Zealand Weekly", 9 July, 2007. 2 The consensus is made up of the average of forecasts from NZIER, Berl, ANZ- National Bank, ASB Bank, BNZ Bank, First New Zealand Capital, Deutsche Bank, UBS, Westpac, Reserve Bank of New Zealand and Treasury. Because the consensus forecasts are done only every 3 months, some of the more recent forecasts will be more accurate.
