CTU Economic Bulletin No. 78

March 2007

Either read on, or download a printable version here (MS Word 246k)

Comment

The latest NZ Institute discussion paper So Far Yet So Close sparked another round of negative comment about the prospects for the manufacturing sector in New Zealand. At times it appears as if there are only two business models being discussed – either Buy Kiwi Made or contract all manufacturing offshore to China and India. Of course, Buy Kiwi Made is about support for NZ manufacturers in the domestic market. What the NZ Institute was mainly focused on was the export sector. The report made three main suggestions: strengthening air and shipping links; rethinking location of production and distribution to be closer to the end-consumer or to international transport infrastructure, and; develop virtual supply chains to allow New Zealand firms to exploit strengths in the ‘weightless economy’.

Coming on top of major concerns about the impact of the ‘food miles’ debate in Europe and the renewed emphasis on sustainability, the report makes some telling points. The section on developing ports infrastructure is excellent. And despite the fact that an all-embracing carbon footprint analysis of many of our exports shows that the energy used in transport to markets is offset by low energy inputs in production, the ‘food miles’ perception could have a real commercial impact.

But the depressing thing about So Far Yet So Close is that it does not acknowledge the value of a manufacturing base in New Zealand as a platform for expansion. Fisher and Paykel Ltd is quoted as an example of a firm now establishing more offshore production. But that same company is building on decades of experience with a workforce in NZ integrated into design and innovation. It started in 1934 and has several thousand employees. Nor did the report refer even once to the Manufacturing + Report which was released last November and set out a strategy to modernise the manufacturing sector in New Zealand. So what was missing from the NZ Institute approach is a business model that builds on existing manufacturing capability, and charts a path for a strong manufacturing sector that may have some offshore production that links into global supply chains and is close to markets, but also establishes a significant rather than just a small number of high paid manufacturing jobs in NZ. And where is the confidence that New Zealand can be seen as a high quality manufacturing environment that can attract investment and achieve greater scale?

The other alarming trend among many analysts is to be blasé about employment in New Zealand and therefore argue that there is no great loss if more and more production is done offshore. Sure we have relatively low unemployment. But we also continue to see significant redundancies, ongoing loss of skilled workers to higher paid jobs offshore, and very high labour market churn with some 700,000 workers (out of a 2.1 million labour force) starting a new job each year. No-one denies that labour costs are cheaper in China and India. We know that many large markets are thousands of kilometers away. But if subscribe to a business model that only retains in this country a bit of investment and some intellectual property in manufacturing while abandoning most of the jobs to offshore facilities, we will not only destroy thousands of jobs, but we will also undermine the base for manufacturing innovation and development.

Meanwhile on 1st April annual holidays will increase to 12 weeks a year. Well no… but April Fool’s Day seems as good a day as any to size up the minimum wage by 9.8%, increase family support and make an historic increase in annual leave to 4 weeks per year for every worker. This is the first increase for 30 years and is the culmination of a huge campaign by unions.

Consensus forecasts published by NZIER¹

The consensus forecasts were updated in March 2007.

Economic Snapshot

Consumer prices fell by 0.2% in the December 2006 quarter and were up by 2.6% annually. Food prices were up by 4.5% in the February 2007 year. The next CPI update is on 18th April 2007. Unemployment is at 3.7%. Maori unemployment is 7.2% and Pacific peoples’ unemployment is at 6.8%, compared with 2.6% for European/P?keh?. The minimum wage is $10.25 for those aged 18 years and over and $8.20 for 16 to 17-year-olds and trainees. On 1 April 2007 these rates will increase to $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. The Labour Cost Index (LCI) shows that ordinary time wages went up by 3.2% in the December 2006 year (3.2% in the private sector and 3.5% in the public sector). Probably the key statistic for unions to note is that, where there were wage increases in the last measured quarter, the average rate of increase was 5.2% and the median increase was 4.2% (the average for the year was 5.5% and the median was 4.2%). The next update of wages data is on 7th May, 2007. Economic growth increased by 0.8% in the December quarter and 1.5% in the December 2006 year. This compares with a 2.2% increase in 2005. The official cash rate was raised by the Reserve Bank on 8th March to 7.5%.

Economic Growth

Economic activity increased 0.8% in the December 2006 quarter. This was a bit below predictions. Household spending grew 1% in the period, partly due to falling petrol prices. Residential construction was up by 2.3% in the quarter, but there was another fall in export volumes - down 2.7% in the fourth quarter, after falling 3% the previous quarter. Monetary policy contracted exports but did not affect housing. The high exchange rate also impacted on exports. In the year ended December 2006, the economy grew 1.5%. This compares with 2.2% for 2005 and a high (at least in recent years) of 4.7% in 2002.

Labour Productivity

The latest labour productivity figures show that labour productivity in the measured sector (which excludes property and business services, Government administration and defence, education, health and community services, and personal and other services) was up by only 0.4% in the March 2006 year, compared with 2.1% in the March 2005 year and an annual average back to 1988 of 2.5%. The main reason for the low productivity figure was that economic growth (in the measured sector) slowed from an annual increase of 4.1% in the March 2005 year to 1.4% in the March 2006 year whereas the rate of employment growth also fell but from 2% in 2005 to 0.9% in 2006. Comparing these statistics with the Reserve Bank measurement of labour productivity overall for the last 6 years shows a slightly lower annual average of 1% compared with 1.2%, but also quite different figures in each year.

Benefits and allowances rise

On 1 April there is an increase of 2.63% in the rates of benefits, allowances and Community Services Card thresholds.

Food Prices up sharply for year

Food prices increased 4.5% from February 2006 to February 2007. Although there are some technical issues affecting this statistic because the practice of seasonally adjusting fresh fruit and vegetables has been discontinued, this increase impacts significantly on lower income workers as it is very hard to adjust basic food expenditure when prices rise. The most significant upward contributions were from fruit and vegetables which were up by 18.5% and meat, and poultry and fish up 5.5%.

Housing and Property

Home affordability is back in the spotlight with a report showing that as at the end of February, the ratio between a mortgage payment on a median priced house and average take-home was 73.5%, up from 65.5% a year ago.  Five years ago, it took 40.3% of take-home pay to make a mortgage payment on a median house. Affordability varies widely, with the least affordable regions being Central Otago Lakes, Auckland and Northland. This survey assumes that a mortgage is for 80% of the house value on a 2-year fixed term and uses REINZ prices rather than Quotable Value. Obviously this does not mean that the average person is using 73.5% of their pay for the mortgage as there will be more than one income in many cases paying the mortgage and the results could be skewed by people on high incomes. But it is yet another indication of the major problem facing those trying to buy a home and those struggling to meet mortgage payments. This survey needs to be looked at alongside previous surveys showing that home affordability has fallen in recent years as house prices have risen much faster than wages. Meanwhile, Quotable Value property statistics released on March 12th report a 9.3% growth in residential property values over the past year. The average New Zealand sale price increased from $356,028 last month to $363,017 this month. The value of residential building work rose 3.1% in the December 2006 quarter, with commercial construction up 3.5%.Over the whole of 2006, all building work was up 3.1% on the previous year, but once adjusted for inflation it was more or less the same. The trend for the number of new dwellings shows a decline since August 2006. Consents were issued for 2,092 new dwellings, compared with 2,254 in February 2006.

Unemployment

At the end of December 2006, 39,000 working aged people (aged 18–64 years) were receiving an Unemployment Benefit. Over the year to December 2006, the number of recipients of an Unemployment Benefit decreased by 13,000, or 25%. The number of people receiving an Unemployment Benefit at the end of December has decreased from 134,000 in 2001 to 39,000 in 2006. Meanwhile employment growth for Pacific peoples rose by 3.8% per year over the period 2001 to 2006. The economy-wide average for the same period was 2.7% per year.

Job Vacancies

There were 6,436 advertised job vacancies measured in February 2007: 6% fewer than in the same period 12 months earlier. There were still, however, 17% more advertised vacancies in February 2007 than in February 2003.

Labour Turnover Rates

The latest Linked Employee Employer Data (LEED) shows that high labour turnover rates continue. In the year to December 2005, 312,480 employees per quarter began work with a new employer and 297,160 left an employer, resulting in an average quarterly worker turnover rate of 17.6%. The private sector had a higher average quarterly worker turnover rate (18.8%) than the public sector (12.7%). Higher private sector rates may be driven by higher worker turnover in industries such as agriculture, forestry and fishing; and accommodation, cafes and restaurants. By firm size, the average quarterly worker turnover rate for December 2005 was highest in firms with 1–5 employees (19.2%) while firms with 100 or more employees had the lowest worker turnover rate (15.8%).  It has been estimated that although there are over 1.2 million occasions each year that someone starts a new job, this involves 700,000 people (as already mentioned earlier in this Bulletin) commencing a new job in any one year – out of a labour market of 2.1 million people.

Trade

The monthly trade balance for February 2007 was a deficit of $127 million (4.5% of exports). The trade balance for the February 2007 year was a deficit of $5.8 billion (16.4% of exports). This compares with a deficit of $6.0 billion for the January 2007 year and $7.3 billion for the previous February year, and it was also the lowest annual deficit since September 2005. The commodity that contributed most to the merchandise exports increase was milk powder, butter and cheese, up $142 million (31.0%). At $601 million in value, milk powder, butter and cheese contributed 21.1% to total exports, and were at the highest value recorded for a February month. By country of origin, the largest increases in imports were from the China up $116 million, and Australia, up $94 million. According to the Reserve Bank’s Trade Weighted Index, the New Zealand dollar dropped 0.4% in February 2007 (compared with January 2007), and is 0.7% lower than in February 2006.

Balance of Payments

The seasonally adjusted current account deficit increased $329 million in the December 2006 quarter, to $3,537 million. The widening of the income deficit in the December 2006 quarter was due to an increase in income payments to foreigners on their investments in New Zealand, and reflected a return to similar levels recorded in previous quarters. The 9% current account deficit reflects the fact that even in periods when exports improve and imports decrease; the investment income flows completely overshadow the trade figures. Over $12 billion of the $14.4 billion deficit comes from the investment income side. And most of that $12 billion is due to profits going to overseas owned firms in New Zealand and also bank borrowing offshore to finance mortgages. And that is driven in part by the problem of home affordability.

Government Accounts

Figures for the seven months ending January 2007 were released by Treasury on March 14th. These figures show an operating surplus of $5.57 billion, higher than the $4.30 billion forecast. The main contributors to this increase were the largely unrealised gains on investment held by the New Zealand Superannuation Fund, ACC and the Government Superannuation Fund. Higher than forecast foreign exchange gains of $0.3 billion also impacted. The OBERAC (Operating Balance Excluding Revaluations and Accounting Changes) stood at $4.42 billion and was broadly in line with the forecast. The Governments net worth was up $0.8 billion to $87.3 billion following a Revaluation of the rail network ($10.3 billion), higher than expected net investment returns and delays in departmental spending ($1.3 billion).

Migration

In the year that ended February 2007, there were 82,500 permanent and long term arrivals, up 3,000 (4%) on the February 2006 year. Over the same period, departures decreased by 1,800 (3%) to 69,300. As a result, net migration was 13,200 in the February 2007 year, compared with 8,300 in the February 2006 year. In the year ended February 2007, there was a net inflow of 10,500 from the United Kingdom, up on 10,000 in the February 2006 year. The Philippines has become the second-largest source of net migration to New Zealand, increasing from a net inflow of 500 in 2005 to 900 in 2006 and 2,600 in the February 2007 year. There were also net inflows from India (2,400) and Fiji (2,200) in the February 2007 year. The net outflow to Australia was 22,200 in the February 2007 year, up on 21,100 in the February 2006 year. This is the highest net outflow to Australia in a February year since the net loss of 31,500 in 2001.

Student Debt

Student debt was picked to reach $9 billion on March 28th, up from $5 billion in 2002. Ministry of Social Development figures to the end of 2006 showed an estimated 167,420 students had outstanding student loans, with an average loan of $7818.

US Income Trends

Income inequality grew significantly in 2005, with the top 1% of Americans, those with incomes that year of more than $348,000, receiving their largest share of national income since 1928. The new data also shows that the top 300,000 Americans collectively enjoyed almost as much income as the bottom 150 million Americans. Per person, the top group received 440 times as much as the average person in the bottom half earned, nearly doubling the gap from 1980.

Notes 

1 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.