CTU Economic Bulletin No. 33

The January 2003 bulletin includes the outlook for the New Zealand economy, economic snapshot, GDP and Sustainable Development.

Comment

The New Zealand economy continues to look strong compared with many other countries. Domestic demand is strong. The Government is in a good fiscal position. Many key indicators such as consumer prices and employment compare favourably with past levels and also other countries.

But the outlook is uncertain, and the trends are not good either. The uncertainty is partly due to the impact of a possible war. An invasion of Iraq would have a major impact on trade as security issues could affect the movement of goods and people.

New Zealand is vulnerable to oil price rises as we showed in 2000 when inflation quickly spiked to 4%. The global economic outlook is dominated by the prospect of war, but also growing levels of debt, deflationary pressures, and rising unemployment which has ballooned out by 20 million world-wide since 2000 to reach 180 million.

he trends in New Zealand are for falling export returns and a widening trade deficit. The exchange rate is being driven up due to a weakening US dollar, a stronger NZ economic performance than others (including Australia), and relatively high interest rates. The NZ dollar is at its highest level against the Australian dollar for 7 years. Retail sales and housing are continuing to show strong results. Nearly 100,000 houses were sold last year. Residential consents were up by 33% but non-residential only by 1.3%.

So what is the outlook for the New Zealand economy? For those willing to guess in an uncertain world, a slowing in economic growth is predicted by most.

The BNZ for instance said this month that "Overall, mainly because of restrained exports, slower jobs growth, cautious business investment, and low consumer confidence, we see New Zealands growth rate slowing down, but a recession being easily avoided.

But one must remember that we make this forecast assuming things go ok for the West in the Middle East and oil prices dont spike

Given that we have zero special insight into developments over there people should be prepared for surprises".

For unions (apart from continuing to oppose US intentions regards Iraq), it makes sense for us to step up the momentum around economic development and industry training alongside labour market reforms and a stronger emphasis on social development.

Investment in quality infrastructure, using the fiscal surplus to benefit those who need it most, and continuing with a sustainable development programme will not only improve the economy in the long run, but will (along with lower interest rates) prevent a significant fall in economic performance this year.

Economic Snapshot

This is a snapshot of key indicators for unions. Since the last Bulletin the CPI has changed, there are new GDP results, and the current account deficit has risen but most other statistics in this section are due for update in the next month or so.

Consumer prices rose by 0.6% in the December 2002 quarter and 2.7% in the December 2002 year. Food prices fell by 0.7% in the month of December. The annual increase for food prices was 0.6%. Unemployment is at 5.4%. Ordinary time wages as measured by the Quarterly Employment Survey were up 2.6% in the private sector and 4.5% in the public sector. The Labour Cost Index increases showed private sector wages up 2.1%, and public 2.7%.

The key statistic for unions to note probably is that the LCI shows that for those firms where there were wage increases in the last measured quarter, the average rate of increase was 3.8%. The increase in GDP for the June 2002 quarter was 1.7%, September quarter 1.0%, and 3.9% for the September 2002 year. The current account deficit is estimated to be 3.8%. The official cash rate is 5.75%.

Government Accounts

The figures for 5 months of the financial year show an operating balance $103 million ahead of forecast and Net Crown Debt down to 14.3% of GDP.

There are some timing issues in relation to expenditure that impact on these figures but they are in line with the strong outlook for surpluses over the next few years as indicated in the December Economic and Fiscal Update. That showed that on the operating side the Government is nearly $1 billion up on the 2001/02 operating surplus forecast at Budget time.

Over a four year period 2002 to 2006 the forecast operating surplus is up by $3 billion to a $16 billion total.

Gross debt is already below the Governments target of 30% of GDP and is forecast to fall to 25.1% by 2006.

Budget priorities were stated as: "higher living standards for all through growth and innovation, including initiatives to develop, attract and retain skills and talent and to increase New Zealands global connectedness; - supporting a productive and cohesive society through investing in health, education and social services and through the establishment of a Commission for the Family;- reducing crime and the impacts of crime; and- investing for the future through a broad-based capital programme and through the partial pre-funding of New Zealand Superannuation".

GDP

Growth as measured by the gross domestic product showed an increase of 1% in the September quarter and 3.9% for the September 2002 year.

Sustainable Development

The Government has announced a sustainable development action programme based on a partnership approach and with an initial focus is on water quality and allocation, energy, sustainable cities, and child and youth development.

Consumer Prices

There was a 0.6% increase for the December 2002 quarter and 2.7% for the December 2002 year. Food prices fell by 0.7% in the month of December with grocery, meat and fish the main factors.

That means the annual increase for food prices was 0.6%. Seven of the nine groups in the CPI recorded increases in the December quarter, while prices for household operations were unchanged and financial and credit service charges fell 1.3%.

The largest quarterly price rises were in transportation and housing groups (both up 1.4%), reflecting higher costs for international air travel and house construction and purchase respectively.

The goods prices component of the CPI rose by a modest 0.2% in the December quarter, the same as in the September quarter. This largely reflects lower import prices because of the currencys rapid appreciation. The annual increase for goods inflation was 1.9%.

However, service prices jumped 1.5% in the quarter, lifting the annual increase from 3.5% to 4.2%. And central and local government charges rose 0.9% in the December quarter, lifting their annual rate to 5.4%. Many forecasters are tipping that the CPI will fall closer to 2% annually over this year.

Poverty Indicator Report

The New Zealand Council of Christian Social Services has updated the Poverty Indicator Report which shows that many of the people using foodbank services are in debt. At some participating foodbanks, debt is reported by up to 90% of the applicants.

Owing money to Work and Income is the most common debt reported, although a significant proportion of applicants are in arrears on utility or electricity bills. The report shows that the average weekly household income of people presenting at the foodbanks ranges from $184 to $300, compared to the New Zealand average of $810 a week. Housing costs were of particular concern.

Trade

The latest figures show a provisional trade deficit of $1.34 billion for 2002 compared with a $988 million surplus in 2001. The value of imports for the December quarter was 2.2% up from a year earlier.

However, this represents a 9% increase in the volume of imports when we include the exchange rate effect. Exports returns were 8.4% lower than a year earlier despite an estimated 7.5% increase in volumes. The exchange rate effect is considerable.

For instance a one-cent movement in the NZ/US exchange rate equates to nearly $1 off the price of a lamb. And the ANZ Commodity Price Index showed a 3.5% lift in commodity prices over the December 2002 year but this still meant a 14% fall in NZ dollar returns "at the farmgate".

Manufacturing

The latest surveys of manufacturing continue to show reasonably positive signs (seasonally adjusted manufacturing sales increased by 1.7% with the effect of price changes removed, in the September 2002 quarter, compared with the previous quarter) although the PMI (Performance of Manufacturing Index) conducted by Business New Zealand and the ANZ showed a decline for December.

Nevertheless all regions and seven of the eight sectors in the survey showed expansion. Of note was the finding that "Some respondents expressed the need to lift wage rates in response to difficulties attracting suitable applicants". Interesting to see Business New Zealand publishing such a survey!

Interest Rates

The official cash rate remained at 5.75% but the Governor noted that "there may be scope for a cut in the OCR later in the year".

The next announcement is on 6th March. Essentially the OCR decision is a trade-off between domestic pressures particularly with housing, and falling export returns due partly to the rising exchange rate.

We support a cut in interest rates because of the accumulating impact of lower export receipts and also investment uncertainty. We do not have a major inflation problem in New Zealand. We do have an absolute requirement for all key policy settings (including monetary policy) to underpin sustainable economic development.

Work Stoppages

Eleven work stoppages ended in the September 2002 quarter. The number of stoppages is lower than the June 2002 quarter, while the number of employees, loss of person-days of work and estimated loss in wages and salaries are higher.

In the September 2002 year, there were 38 stoppages. The manufacturing industry contributed 14 of these with in health and community services, 6 in education, 4 in transport and storage, with 3 stoppages in personal and other services.

Although manufacturing had the highest number of work stoppages, education recorded the highest number of employees involved, loss of person-days of work and estimated loss in wages and salaries. The education sector contributed about 78% of the total 35,381 employees involved.

Housing

As noted above nearly 100,000 homes were sold last year. But because prices are surging ahead of incomes, home affordability has fallen by 24.4% over the year. The median price lifted by 10.7% in the year. This impacts most on new buyers as many existing homeowners have an appreciating asset.

There are signs also that homeowners are willing to boost debt levels in these conditions. Housing consents were up by 33% last year but non-residential only by 1.3%. Waiting times are growing due to labour shortages.

Retail sales

Retail sales were up by 0.5% in November and 7% for the November 2002 year.

Migration

There were 96,100 permanent and long-term arrivals in the year ended November 2002, up 17,200 or 22% on the November 2001 year. In contrast, there were 16,100 or 22% fewer departures (57,900) in 2002.

The overall result was a net migration gain of 38,200 in the November 2002 year, compared with a net inflow of 4,900 in the previous year.

Clusters

The Government is giving some financial assistance to a number of clusters including the Kumara Industry Network, Northland Wood Processing, Northland Marine, Film Auckland, Modus Operandi, Waitakere & Rodney Organics, Archimedes, Waikato Ag Biotech, East Coast Timber Processing and Furniture Manufacturing Industries Cluster, Wools of Aotearoa, Wood Hawkes Bay, Oil and Gas Technologies, Kapiti Horowhenua Apparel and Textile, Wellington Creative Manufacturing, Nelson Marlborough Seafood Cluster, Canterbury Software, Aoraki South Canterbury Functional Foods, Biosouth, Otago Southland Forestry, and the Lincoln Resource.