CTU Economic Bulletin No. 26

The May 2002 CTU Economic Bulletin includes comment on the Budget, wages, employment, food prices, interest rates, Innovation Task Forces, trade, health boards, migration.

Comment

Although the Budget was promoted as "no surprises" and "boring", it did surprise analysts with the strength of the current operating surplus.

This has also to be seen alongside a drop in predicted net debt for 2003 to 16.8% (well below the Government target of 20%). The operating surplus forecast originally was for $765 million. With monthly updates since then showing higher revenues, most were expecting about $1.5 billion, but not $2.3 billion.

The Minister of Finance is at pains to point out that the Government is being "counter-cyclical" meaning that as economic activity, inflation and interest rates are rising, it is stabilising for the Government not to spend the surplus as that would risk "overheating". Also, he argues that the surplus is the difference between two large numbers (of around $40 billion) and that a small change in revenue would soon gobble up much of the surplus.

Finally, he argues that the surplus is not cash because the Government is still borrowing, and also if the surplus is put on to baselines in the Budget, then there is a risk of actual cuts in the future should the economy slow.

But there is no doubt that the self-imposed spending cap of $6.125 billion in new spending over the three years, the decision to ensure there are significant reductions in net debt, and the large sums being put into the NZ Supernnuation Fund, mean that some areas of new spending may have been ruled out. The pressure areas are probably - education, health, state sector capacity (including pay rates for quality state-funded services) and greater assistance for low-income families.

It was the last area that the National Party leader concentrated on in his public comments on the Budget. But as we all know, Bill English is so worried about low-income families that he is promising tax cuts to high-income individuals! But what we also know is that the accumulated social deficit, incidence of real poverty, and reductions in state sector capacity that built up over more than a decade will take time to overcome, but must be treated as an on-going priority.

What the Budget clearly signalled was the stark choice facing us. On the one hand we have a Government that is investing in the medium and long-term future of all of us. This is shown through the last 3 years with very large levels of expenditure on increasing superannuation payments ($684 million), state house rental reductions ($257 million) and abolishing interest on student debt while studying ($490 million) alongside the establishment of Industry New Zealand, the new $100 million venture capital fund, modern apprenticeships and greater funding for industry training, plus a significant capital expenditure programme in hospitals, roading, schools, and also broadband capacity.,/p>

On the other hand, we have a National Party promising substantial tax cuts for firms and high-income earners, privatisation of ACC, substantial amendments to the Employment Relations Act (including a provision that will allow employers to impose contracts on new workers that prevent them in the first 3 months from lodging a personal grievance over dismissal, unfair treatment, sexual harassment, and racial discrimination), exemption of small businesses from regulations and reporting requirements, changes to the Resource Management Act, Occupational Health and Safety Act, Hazardous Substances and New Organisms Act and other "major compliance Acts", a reduction in Government spending as a proportion of GDP, and scrapping the NZ Superannuation Fund.

So although there are grounds to say the current Government may have done a lot - but has a lot more to do, we now have a clear and very different choice of economic direction emerging between the current Government and a National/ACT programme.

Meanwhile, there is a lot happening in the "markets". The prospect of an early election, a new Reserve Bank Governor, a new Policy Targets Agreement (PTA) for the Reserve Bank, and the interplay between the rising exchange rate and interest rates is generating a fair bit of speculation - both financially and analytically.

Wages

Private sector wages rose by 0.6% in the March 2002 quarter and 2.5% in the March 2002 year according to the Quarterly Employment Survey. Market expectations were for a 1.0% quarterly rise. The Reserve Bank had forecast a 1.3% rise. This shows how these forecasts are consistently overestimating the level of nominal wage rises. Public sector wages rose by 7.3% over the year (but part of this is due to compositional changes in the workforce which could even include Air New Zealand employees coming into the state sector for these statistics).

The Labour Cost Index showed a 0.5% rise in the March 2002 quarter and 2% for the year. However, the average level of increase for those in the private sector who received an increase in the March year was 4.2% and 3.7% for the March quarter. The average ordinary time hourly rate is $18.71. It is $16.96 for women which is 84.3% of the $20.13 average wage for men. It is $23.46 in the public sector and $17.54 in the private sector.

Employment

Unemployment is now 5.3%. The working age population rose 16,400 (0.6%) over the quarter. This increase can partly be attributed to a net gain of 8,500 from permanent and long-term migration to the working age population, continuing a similar trend shown in the December 2001 quarter.

Unemployment rates for the March 2002 quarter were 4.2% for European/P?keh?; 10.8% for M?ori; 9.7% for Pacific Peoples. The seasonally adjusted figures show unemployment increased by 1,000 and employment grew by 63,000. The number of unemployed was 104,000, the jobless figure was at 188,500 and those underemployed numbered 106,100. The levels of full-time and part-time employment were up by 30,000 (2.1%) and 36,000 (9.0%) respectively. The Quarterly Employment Survey shows full-time equivalent employment up 3.7% in the February 2002 year. Meanwhile the ANZ Jobs survey showed a 6.3% rise in April for newspaper job advertisements. The timing of Easter may have affected the figures. The level of advertising is 6.1% lower than the July 2001 peak.

Food Prices

An annual food survey has registered the biggest increase in the price of groceries for 30 years. The Otago University study is based on the cost of a nutritious diet for a week. Last year, the price of goods such as meat and dairy products soared in price, with lamb up the most at 21%.

However, the latest survey from Otago Universitys Human Nutrition department shows the cost of all food has risen, with Auckland and Wellington the most expensive places to fill the shopping trolley. The survey is based on how much it costs to feed each member of the family a week. It works out at between $230 and $345. The annual increase was usually two or three dollars a week per person, but this year it was up to nine dollars, the highest since 1972.

Interest Rates

With Australia having lifted their official cash rate (OCR) to 4.5% and the US remaining at 1.75%, the higher figure of 5.5% in New Zealand is combining with the lower US dollar to push the NZ exchange rate with the US up to nearly 48 cents.

There were two main areas of concern when the acting Governor, Dr. Carr put up interest rates on 15th May. One was the actual increase, but the other was his very aggressive intentions to raise rates over the next year. But the growing evidence of falling commodity prices, and the strengthening NZ dollar, may just persuade the Reserve Bank to be more cautious.

For instance, some analysts are now saying that although they still expect the Bank to hike the OCR by 0.25% at each of the next two meetings (3 July and 14 August), the firming in monetary conditions that is now occurring via a stronger NZ dollar, and the downside risks to the growth mean that the likelihood that the OCR will reach the 6.75% level signalled in the RBNZs May Monetary Policy Statement is fast reducing.

Innovation Task Forces

Nominations from the CTU were successful on a number of the new Taskforces in the Growth and Innovation Framework. Paul Goulter is on the Growth and Innovation Advisory Board. Diana Rowan is on the Screen/Film Taskforce, Steve Harris on the ICT (Information, Communication and Technology) Taskforce, and Ray Potroz is on the Biotechnology Taskforce.

Trade

A provisional merchandise trade surplus of $19m was recorded in April, compared with a surplus of $349m in April 2001 when the sale of dairy products and meat accounted for a big increase in exports.

The average deficit for April over the past 10 years is $149m. The result was much weaker than the market expectation of a $286m surplus. Export values were in line with expectations but import values were much stronger than expected. The main driver was higher business investment with machinery imports up 27% in April. Despite a strong April month, the estimated level of imports for the three months to April was just 2.4% higher than a year earlier. Strong growth in import volumes has been partially offset by lower prices, especially for oil and the impact of a stronger NZ dollar. The annual trade surplus was $536m, compared with a surplus of $865m in March and a deficit of $561m a year earlier.

The average foreign currency price of New Zealands commodity exports rose by 0.2% in the month in April. However, the average price was 8.8% below last years level. Predictions are for a further steady fall in export returns. In foreign currency terms, dairy product prices fell by a further 1.9% in the month to be 28.2% lower than a year earlier. A 12.6% in the month rise in timber prices and a 1.6% in the month rise in beef prices helped to offset this fall. Reflecting the appreciation of the NZD during April, the NZD price index fell 2.0% in the month to be 16.6% weaker than a year earlier.

Meanwhile the US has announced an intention to lift subsidies to farmers by NZ $400 billion over the next 10 years. Nearly half of the current subsidies go to 8% of US farmers.

Health Boards

The hospital and health service (HHS) provider functions of New Zealands 21 district health boards (DHBs) have recorded a fall in their operating expenditure for the first time since June 1998. Total seasonally adjusted operating expenditure fell by $9.3 million or 0.9%.

This brings the total seasonally adjusted operating expenditure to $1000.1 million. This figure is down from last quarters result which saw operating expenditure exceed $1 billion for the first time, and reach the highest level since the series began in September 1993. Total income continued to rise during the March 2002 quarter, reaching $964.1 million, an increase of $8.3 million or 0.9% compared with the previous quarter.

Total income is now 1.2% higher than in the March 2001 quarter. Government revenue, which makes up 92.1% of total income, was the main contributor to the increase, rising $10.6 million or 1.2%. Partly offsetting this increase was a $3.2 million decrease in medical charges and all other income. This quarter also saw total taxpayers equity fall by $23.3 million to $843.1 million, down $55.6 million on the same period a year ago. Sustained deficits remain the primary reason for this decline. Correspondingly, total debt increased $58.8 million between March 2001 and March 2002.

Migration

Adjusting for seasonal effects, a net 3,100 people migrated to New Zealand in April, taking the annual net inflow to 28,065. This compares with an annual net outflow of 11,400 in the preceding year. The turnaround in migrant flows over the past year is equivalent to just over 1.0% of the countrys population.

There were net inflows from China (13,200), India (5,300), the United Kingdom (3,900), South Africa (3,200), Fiji (2,400) and Japan (2,300), in the year ended April 2002. Conversely, there was a net outflow to Australia of 15,400, less than half the net outflow of 31,100 in the April 2001 year.

Capital Goods, Farm and Producer prices

Producers output prices rose (0.4%) while input prices fell slightly (0.1%) in the March 2002 quarter. The 0.1% fall in producers input prices followed a 0.5% decline in December quarter 2001. The main downward contributions came from a 6.2% fall in meat product prices, more than offsetting higher livestock purchase prices. Input prices are 2.8% higher than a year ago, up from 1.8% annually last quarter.

The 0.4% increase in producers output prices, was mostly from a 4.1% rise in electricity charges and a 5.3% increase in forestry and logging. Annual output price growth rose from 2.6% to 3.1%. Meanwhile the capital goods index increased 0.5% in the March 2002 quarter, with the most significant factor being house prices.

Retail Sales

Monthly retail sales fell 0.8% in March, unwinding almost half of the previous months 2% rise and well below expectations. But retail volumes were strong, up 2.2% in the March 2002 quarter. Over the March 2002 quarter as a whole, the value of nominal retail sales increased by 2.6%.

Bank profits up

The annual survey of the financial sector by KPMG shows that the underlying profitability of banks in New Zealand rose 18%, with strong rises in asset growth and operating income. The decline in the number of bank branches continued to slow, with 15 closing in the last year, while the spread of automatic teller machines is still growing. For the first time since 1995 there has been an increase in employee numbers among most banks, with an extra 318 people employed.

Venture Capital Funds launched

The Governments Venture Investment Fund (VIF) with $100 million has chosen six managers in order to enter into negotiations to establish VIF Seed Funds that invest in high potential New Zealand start-up and early stage businesses. The Seed Funds must be able to show they can match every $1 in public money with $2 from the private sector.

Property and construction

Average NZ house prices rose 1.5% in the March quarter after rising 1.7% in the December quarter. The total number of new dwelling consents issued increased 9.9% in April following a 4.7% decline in March. The number of dwelling consents issued was 29.6% higher than a year ago. The latest rise was driven by an increase in consents for apartments.

Excluding apartments, the number of dwelling consents issued decreased 0.9% in April following a 5.9% rise in March, and was 19.1% higher than a year earlier. Non-residential building consents were however 13.7% lower than a year earlier. The national median sale price for all farms has eased by 5.89% from April 2001. The national median sale price for April dropped to $720,000 from $815,000 in March and $765,000 for April a year ago.

For further information contact Peter Conway at peterc@nzctu.org.nz or 04 802 3816