CTU Economic Bulletin No. 36

News from the labour market - April 2003.

Comment

How have we ended up in a situation where the Road Transport Forum can conduct a survey which reveals that there is likely to be a shortage of 4000 drivers by 2005 and that potential drivers are discouraged by among other things low pay and long hours?

This is indicative of a more general problem in the labour market. Employers are responding to labour market shortages by putting more pressure on existing staff. In many cases, they are not paying higher wages, or if they are, they are paying "at the margin".

In other words, they might pay the next individual a bit more, but they are not addressing pervasive low pay. Wage rates in New Zealand (adjusted for the exchange rate) are about 25% lower than in Australia. If there were an award system, then the pay rates would be much higher in many industries.

It is a hard ask for many unions to establish improved wage rates across a whole industry using enterprise bargaining in a minority of firms. This is part of the explanation for the puzzle many economists are wondering about - why are wages so slow to respond to skill and general labour market shortages? Other reasons could be a lag - where wages take quite a long time to respond to shortages, unevenness where some parts of the labour market are responsive but other parts are not - and so on.

There are many other possible reasons (including low investment in productivity enhancing technology) but a key factor is the low industry responsiveness to skill and labour shortages because of a lack of industry mechanisms (such as real promotion of multi-employer bargaining).

The economic outlook is now looking gloomy. Although the Government fiscal position is strong, and we are still sitting on relatively high levels of employment and GDP growth - the impact of SARS (on trade, tourism and employment), electricity shortages and price spikes, the ongoing effect of the drought on stock numbers, the dislocations in trade due to war in Iraq, lower commodity prices (mainly dairy), lower export returns and the downward revisions in world growth forecasts are all contributing to a perception that we are in for something of a rough ride.

However, many predict it could be a short dip rather than a long one, and that the NZ economy is well-placed to ride it out. But that remains to be seen - and workers are always the first to be disadvantaged when the economy dips. This is one of the reasons why the CTU has argued so strongly for a cut in interest rates.

It is against this background that the next Budget will be delivered on 15th May. Unfortunately the Government has signalled that major social development expenditure will need to wait until the next Budget on 2004 and will take the form of tax credits for low income earners.

This coming Budget will according to the Minister of Finance focus on "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".

We are now in the period of a series of pre-Budget announcements and indications - more funding for the Probation Service, a boost to early childhood education, cash for extra teachers, more funds for industry training, funding for the new Trade and Enterprise NZ organisation from the merger of Industry NZ and Tradenz, and so on. When the Budget is announced, we need to look at the figures in real terms (i.e. take out any increases needed due to population growth and inflation) and also look at the number of years the new funding is spread across.

Economic Snapshot

This is a snapshot of key indicators for unions. Consumer prices rose by 0.4% in the March 2003 quarter and 2.5% in the March 2003 year. Food prices fell by 0.4% in March February 2003 and were down by 0.3% in the March 2003 year. Unemployment is at 4.9%. Wage figures were last updated in February.

Ordinary time wages as measured by the Quarterly Employment Survey (November 2002) were up by 3.3% in the private sector and 3.7% in the public sector. The Labour Cost Index increases (December quarter 2002) showed private sector wages up 2.1%, and public 2.6%. 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 (15% of those surveyed), the average rate of increase was 3.9% and the median increase was 3%.

The increase in GDP for the December quarter was 0.8% and 4.4% for the 2002 year. The current account deficit is estimated to be 3.1%. The official cash rate is 5.50%.

Forecasts

A score of 50% correct is not bad for forecasting, so with that caveat I note some of the forecasts around. These are mainly based on the "consensus forecasts". CPI is forecast to be 2.0% for the March 2004 year. However, since that forecast, Deutsche Bank are predicting 0.4% for the June quarter CPI reducing annual CPI to 1.9% for the June 2003 year.

The BNZ are predicting annual CPI to fall to 1.6% by December. Wages (as measured by the QES) are forecast to be up by 2.9% for March 2003 year and 3.5% for the March 2004 year. Unemployment is forecast to rise to be measured at 5.3% for March 2003, and 5.5% for 2004. The official cash rate is expected to fall to 5% by the end of year and GDP growth is forecast to be 2.5% for the March 2004 year.

Consumer Prices

I have already sent out an updated table listing all CPI changes since 1987 and also a revised CTU Real Wage Calculator. The CPI rose by 0.4% in the March 2003 quarter and by 2.5% in the March 2003 year. There was a 6.3% rise in petrol prices, a 1.4% rise in construction costs, higher used car prices (up 1.6%), as well as a 2.8% increase in tobacco product prices that was partly excise tax related. There was a 6.6% fall in international airfares, a 4.9% drop in domestic airfares, and a 0.9% fall in household appliances and furnishings. Tradeables inflation (exports/imports) was -0.1% for the quarter, and non-tradeables inflation was +0.8%.

Food prices fell by 0.4% in the month of March and have fallen by 0.3% from March 2002 to March 2003. This was driven by a 5.4% drop in meat, fish and poultry prices. Partly offsetting this fall were increases in restaurant meals and ready-to-eat food prices (up 2.4%), fruit and vegetable prices (up 1.2%), and grocery food prices (up 0.2%). This is the first drop in annual food prices since May 2000.

Employment

There are many predictions that the job growth of 44,000 in the last year will not be repeated this year. An unemployment rate of 5.5% is predicted for this time next year. Job advertisements fell by 3.1% in March and are down by 1% for the year. Meanwhile, as mentioned above, a survey by the Road Transport Forum predicts a shortage of 4000 drivers by 2005.

The survey revealed among other things that potential drivers are put off by "long hours, time needed for training, and low pay". Maybe the abolition of the award system, and the low investment in training has something to do with this! At least the Road Transport Forum has acknowledged that "improving pay and conditions" are part of the answer. On another matter, the Government will meet half the cost of an employment co-ordinator on the West Coast.

It has also been reported that Treasury estimates that the lower number of people on benefits has saved the Government $937 million in projected spending on benefit payments over 4 years from 1999.

Interest Rates

At last the Reserve Bank responded to the lower inflation track which combined with falling export returns, and a reasonably grim outlook based on war, disease, drought, and electricity shortages to suggest the economy is definitely going to slow. The official cash rate was cut from 5.75% to 5.50%.

Most economists did not predict this result, but now they think the Reserve Bank will keep easing the OCR down to 5% with the next reduction another 0.25% in early June. For instance, Bancorp said that, "For interest rates the abiding fact is that this is the first in a series of rate cuts. Central banks do not cut by 25 basis points and then sit idle awaiting results.

A series of cuts means that the June Monetary Policy Statement should carry a rate cut also". The CTU has been calling for a cut in the OCR based on the need to cheapen the cost of investment borrowing, reduce mortgage interest payments, and prevent further damaging speculation on the NZ dollar which drives up the exchange rate.

Government Accounts

The fiscal position of the Government continues to show considerable strength. The operating balance for the eight months ended 28 February was $919 million higher-than-forecast. This was due to tax revenue being $619 million higher-than-forecast, reflecting higher-than-forecast source deductions ($267 million) and goods and services tax ($246 million), total Crown expenses being $526 million lower-than-forecast, including lower-than- forecast core Crown expenses of $488 million.

These factors were offset by investment revenues being (also) $526 million lower-than-forecast, largely reflecting reductions in the value of financial investments. Note that the Government also uses another measure (OBERAC - which takes out of the operating balance reductions in the value of financial investments) so sometimes you will hear comments about that also.

Gross debt was $359 million lower than forecast, primarily due to the impact of foreign exchange rate movements. Net Crown debt was $908 million lower-than-forecast. This was largely due to improved net cash flows from operations ($862 million), delays in purchases of physical assets ($179 million) and additional issue of circulating currency ($67 million).

This was partly offset by the effect of the appreciation in the exchange rate and also higher than forecast diversification from government stock by the Government Superannuation Fund. Net Crown debt was estimated to be 14.3% of GDP at 28 February, compared to a forecast of 15.0% (and well below the 20% policy target).

Trade

For the year ended February 2003, the updated merchandise exports value is $30,489 million, down 6.6% when compared with the February 2002 year. The updated annual trade balance is a deficit of $1,697 million for the year ended February 2003. The previous February year showed a surplus of $499 million.

The commodity price index expressed in NZ dollars is down 15% on a year ago and is now 28% below its peak in April, 2001, with 80% of that decline due to the higher stronger NZ dollar. Deutsche Bank note that they, "expect that result to translate into a fall in the official export prices index of 5.4% quarterly and a further 1% quarterly decline in the terms of trade. That would take the annual average decline in the terms of trade to 7.3% over the year to March 2003, which corresponds to an income loss of around $2.3 billion (1.8% of GDP)".

Total container volumes at Ports of Auckland were up by 8% for the year to end March 2003 compared with the previous year, although export containers are not increasing. Latest import figures indicate that the value of merchandise imports for the year ended March 2003 is $32,137 million, an increase of 1.0 percent from the March 2002 year. The trade deficit for the March 2003 year is estimated at $1,851 million. However there appears to be a lift in exports in the last 3 months.

Retirement Savings

The Government will introduce legislation to allow employers to tax employer contributions to retirement savings for workers at their marginal tax rate. This potentially benefits workers earning less than $38,000 a year, but unfortunately it is only optional for employers to use the lower tax rate.

Also the Minister of Finance has announced an intention to "hold a forum, in partnership with other interested parties, to discuss ways to revitalise employer-based schemes. The objective is to coordinate efforts to help New Zealanders supplement the state pension with their own retirement savings through their workplace. Ideally, this group would develop a framework upon which to proceed in this area, and ensure broad contribution to any proposed initiatives".

Genetic Engineering

A Government report on GE has shown that the most likely economic impact from the careful and considered release of GMOs would be a small increase in GDP over 10 years, compared to a small decrease from forgoing GMO releases.

The Government said that the report also confirms that the most beneficial way ahead is to actively manage the potential risks and enhance the potential benefits, which it is doing through its response to the Royal Commission report and in its safe, sensible approach to GM. However, the Greens have strongly criticised the report saying that Treasury ignored any results that showed that banning environmental release of GE organisms would have a more positive effect on GDP than GE release. The Greens have also noted that if ancient DNA can persist for as long as 400,000 years, then we have no idea what will happen to GE crops and animal DNA in the longer term.

Migration

There was a net inflow of 3,650 permanent and long-term migrants in March and a total net inflow of 41,230 people in the past 12 months. There were significant net inflows from China (15,900), India (6,300), South Africa (2,400), Japan (2,300), Korea (2,200) and Fiji (1,900) in the year ended March 2003.

There was also a substantial net inflow from the United Kingdom (7,200), more than double the March 2002 year figure (3,400). Conversely, there was a net outflow to Australia of 11,300 in the March 2003 year, compared with 16,100 in the March 2002 year, and 31,600 in 2001.

Housing

House sales rose by 5% in March, reversing most of the decline in the previous 4 months. A poorly performing sharemarket is to some extent focussing attention on capital gain in the housing sector. The median price rose to $200,000, a 7.5% increase from March 2002. Auckland median prices are $279,500. Despite a recent increase in home affordability (up 0.7% in the March 2003 quarter due to a slight lift in wages), there has still been an 18% drop in home affordability since this time last year.

Negotiated Greenhouse Agreements

The first NGA has been agreed. It is with the NZ Refining Company and is first because of pressure from the company to get an NGA before it would commit to a $180 million investment in cleaner fuels. The CTU has been discussing with the Minister, Pete Hodgson, and the Climate Change Office, how unions can be involved in NGAs as there are big implications for workers in these agreements.

Infrastructure Priorities

The Government has announced that New Zealands road, rail, electricity and other infrastructure including substandard housing is to undergo a thorough stocktake by the Ministry of Economic Development and Treasury who will prepare a report on infrastructural needs and priorities. Minister Jim Anderton said that to maintain economic development momentum New Zealand faces billions of dollars of investment on transport, water, energy sewerage, communications and other networks and the Government needs to determine the highest priorities.

Assistance for farmers

The Government has announced assistance for rural co-ordinators, rural sector assistance for families affected by drought, and measures for Inland Revenue to "approve adverse events equalisation for farm businesses in the affected areas". This is entirely appropriate. However, we may not see Don Brash attacking this particular menu of welfare assistance.

Retail Sales

February retail sales (up 0.9% seasonally adjusted) were much stronger than expected but that was due to some timing issues and maybe a small America's Cup effect. Annual sales are up by 6.3%.

Tourism

Guest nights were up to 3.1 million for February, 6% up on last year. But Tourism NZ are predicting that visitor arrivals for the April to June period will be down by about 2%.