CTU Economic Bulletin No. 41

September, 2003

Comment

Developing countries have 90% market share in cocoa beans but only 4% of global chocolate production. Tariffs which escalate with value-added processing lock developing countries into commodity exports. Nearly half of the world's people live on less than US$2.00 a day. The 49 least developed countries have 0.5% of the share of world trade. Agricultural subsidies in developed countries are worth about $1 billion a day - six times more than global aid flows. Of the 1.8 billion people in the world who are under 30, 1.5 billion live in developing countries.

These are just a few of the many statistics which reflect the growing pressures for a fair trading system. Although there are many explanations as to why the Cancun WTO Ministerial meeting failed to reach agreement, the underlying factor is that when such a meeting is loaded up with the many grievances and ambitions over world trade in the context of a systemic imbalance of economic power and resources, agreement is always going to be difficult. What is heartening is that the developing countries are taking a stronger stance. They certainly forced the EU to drop the proposal for negotiations on investment and competition. And they are slowly showing a glimmer of progress on agriculture. But, powerful economic interests in developed countries have many options including bilateral agreements where they can force concessions on investment rules, services etc. Whether the WTO can become an effective framework for multilateral trading rules hangs in the balance. While it may be that Cancun simply represents something of a delay in the negotiation of the Doha round, it may also signal a turning point in power relationships within the WTO. If that is the case, it is still possible for the round to deliver an agreement that is positive for developing countries. But it is just as likely that the WTO will fail to resolve the huge differences between members.

New Zealand, with its significant interest in issues such as agricultural export subsidies, market access, and other farm support applying in the EU and USA, has already removed almost all tariffs. The new G22 group of developing countries has propelled agriculture to the forefront of WTO issues, but any outcome from their efforts will be different than if it had been the Cairns Group leading the charge. New Zealand (who played a good role on labour and environmental issues at Cancun) was encouraged by some small concessions in the draft text on agriculture that emerged during Cancun, but unlike the EU and USA, there is no queue for bilateral trade deals with NZ. The Hong Kong talks have stalled, and the P3 talks (Singapore, Chile, and NZ) are just starting to get into gear. Logically, New Zealand's position should be to strategically support the G22 group of developing countries within the WTO.

Unions at Cancun signalled strong support for the developing countries - on agricultural subsidies, special and differential treatment (so that developing countries have more time and different conditions in any adjustment to tariff changes and so forth), the need for greater transparency in WTO negotiations and processes, and in our opposition to any negotiations on the Singapore issues (investment, competition, trade facilitation, and transparency in government procurement). We also signalled our strong support for the protection of public services.

But although there is considerable sympathy and support by NGOs for the extreme difficulties faced by developing countries, many of these NGOs are less inclined to focus on the exploitation of workers in those countries. Unions are partly at fault for this - for too long we emphasised core labour rights to the exclusion of other key issues. But it has to be an ongoing issue for unions that the WTO refuses to accept any linkage between trading rules and the core labour conditions of workers who make the goods and provide the services under these arrangements. The ILO core labour standards (on child labour, forced labour, discrimination, freedom to organise and collectively bargain) apply to every country irrespective of their stage of development. How can trade ever be "fair trade" if these basic human rights at work are denied? But at Cancun, as at many other WTO meetings, this issue did not even make it on to the agenda. Clearly we have a long way to go.

Economic Snapshot

This is a snapshot of key indicators for unions. In general, the New Zealand economy continues to be lopsided. The domestic economy bounces along due to housing, immigration, credit card purchases and so forth, whereas apart from a recent slight improvement in the trend decline in exports, the overall export sector is being hammered by the high dollar. Consumer prices did not rise in the June 2003 quarter and are up by 1.5% in the June 2003 year. Food prices fell by 0.4% in August and were up by 0.2% in the August 2003 year. Unemployment is at 4.7%. The next release on wages is due out on 7th October and will be included in the next CTU Economic Bulletin. Meanwhile, ordinary time wages as measured by the Quarterly Employment Survey (May 2003) were up by 4.2% in the private sector and 2.3% in the public sector. The Labour Cost Index (June 2003) showed private sector wages up 2.2%, 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 (14% of those surveyed), the average rate of increase was 3.8% and the median increase was 3%. Economic activity (GDP) increased 0.2% in the June 2003 quarter, following increases of 0.6% and 0.8% in the March 2003 and December 2002 quarters. For the year ended June 2003, the economy grew by 4.0%. The official cash rate set by the Reserve Bank is 5%.

Economic Activity

GDP was up by 0.2% in the June 2003 quarter and 4% in the year (although a comparison with activity levels of a year ago shows a growth increase of 2.7%). Predictions are for a stronger quarterly figure for the September 2003 quarter - perhaps 0.8%. Internal demand increased 2.4% in the June quarter sustained by higher household expenditure on consumer durables and new housing construction, and a rise in business investment. Annual spending on durable goods is up by 7.6%, with new housing investment rising 24.8% and spending overseas increasing 9.4%. However, much of the increase in internal demand this quarter was met by imports, up 5.5%. This, together with a fall in export volumes, down 3.1%, resulted in the level of overall economic activity recording the modest increase of 0.2%. Manufacturing activity was down 2.1% and electricity, gas and water fell 8.0% as a result of the power crisis. Activity in the primary industries decreased for the second consecutive quarter, down 2.0%.

Tariff Review

The Government has now announced the outcome of the Post-2005 Tariff Review. Tariffs of between 17-19% will reduce each year from 2006 to 2009 until they are 10%. Tariffs of between 10-12.5% and 5-7.5% will similarly reduce to 5% by 2009. There will be a further review starting in 2006 to consider post-2009 tariffs. The CTU opposed any reduction in tariffs because of the damaging effect on employment, and the impact on the economic development strategy which is just getting under way.

We did however call for a further review in 2008, and when it appeared that there was strong pressure from MED to reduce to zero tariffs, we argued that it would be extremely harmful to reduce tariffs below the Australian level because NZ exporters would face rules of origin restrictions in Australia but none would apply for imports into New Zealand. Although the Australian review decisions have not been made, the Australian Productivity Commission recommendation is that their top tariff will reduce to 10% by 2010. So although we do not agree with the outcome of the NZ tariff review, the rejection by Government of advice to go to zero tariffs, and the decision to align reasonably closely with Australia does at least meet some of our concerns. But the concern must remain about the effect of this announcement on jobs, particularly in the TCF sector.

Fiscal Position

As discussed in the last few CTU Economic Bulletins, the Government continues to run a strong surplus on the operating side of the accounts, and low debt on the capital side. The OBERAC [Operating Balance Excluding Revaluations and Accounting Changes] has come in at $5.6 billion, which is around $1.5 billion above the budget night forecast and reflects higher tax revenues, delays in spending and higher State Owned Enterprise and Crown entity surpluses. The operating balance has gone from around $1.4 billion to $1.96 billion. Gross debt levels are now at their lowest since 1971 and net Crown debt (about 13% of GDP) is around $1.3 million lower than projected at budget time. Trevor Mallard, acting Finance Minister at the time the Government released the final statements for the year ended June 2003 noted that the stronger than expected results, if maintained and if other conditions permit, auger well for the government to deliver on the assistance package to low and middle income families and incentives to assist people to move from welfare to work, which Finance Minister Michael Cullen signalled in the budget speech.

Economic Outlook - GDP, CPI, Wages and Unemployment

The latest NZIER Consensus forecasts (March years) predict growth of 2.3% in 2003/04. from 2.0% to 2.3% in our latest survey. Growth in private consumption is forecast to be 3.3%, residential investment in is forecast to grow by 11.3%, but export growth forecasts have slid to 1.2%. GDP growth for 2004/05 is forecast at 2.7%. Forecasters expect annual inflation to be 1.6% in the March 2004 year. Inflation is expected to lift to 2.1% and 2.2% over the following two years. Wages are forecast to rise 3.6% in 2003/04 and 3.2% and 3.1% in 2004/05 and 2005/06 respectively. The unemployment rate is forecast to be at 5.1% in the March 2004 quarter and at 5.2% a year later.

Housing

Residential property prices for New Zealand increased by 16.2% over the last year. The national median price for August rose to $215,000, up from $211,250 in July and $185,000 in August 2002. The Auckland median is up from $298,000 in July to $315,000 for August. The Auckland median price has increased by 19.3% this year. The median property price in Nelson has risen by 70% in the last 12 months. Neil Hodgson, interim chief executive of the Nelson Economic Development Agency said that many of the high income people in Nelson are not necessarily adding anything to the economy. He said "Theyre not investing in business, theyre just buying a house and living here. All thats doing is pushing up land prices and forcing other people out. We need to find a solution so our vital, but low income, workers can afford to live and work in Nelson". Meanwhile, the national median farm sale price for August was $540,000 compared to July at $680,000, and the August 2002 median of $487,000.

Consents were issued for 2,704 new dwelling units in August 2003. This is the highest number of new dwellings recorded for an August month since 1975. For the year ended August 2003, the total value of consents for all buildings was $8,533 million, up $1,134 million or 15% when compared with the year ended August 2002.

Trade

There are some signs of recent volume growth in exports. But, the deficit in the balance of payments is now approaching $6 billion for the year, nearly double what it was a year ago. Fewer exports and more imports were the main reason for the widening gap. Smaller amounts of wool, dairy products, meat, wood pulp and lambskins explained most of the 3.4% fall in export returns, whereas the 3.1% lift in import values was driven mainly by cars, capital equipment such as aircraft and fishing boats, and unprocessed goods. Though the rising New Zealand dollar over the June quarter kept the cost of imports down, the price falls were not enough to offset the growth in import volumes or the high dollars damaging effect on export returns, especially when export volumes were falling. The New Zealand dollar has appreciated 27% against the US greenback in the past 12 months. Annually, the $5.88 billion current account deficit was $2.7 billion higher than the previous June years. The current account deficit has now risen to 4.6% of GDP, but the rate of increase could start to slow if latest export figures become a trend. New Zealands net debtor position with the rest of the world fell $2.7 billion (2.6%) to $98.3 billion between 31 March 2003 and 30 June 2003.

Food Prices

Food prices fell by 0.4% in August and are up by 0.2% in the August 2003 year.

Retail sales

Retail sales rose for the third month in a row. They were up 1.1% in July. Total actual retail sales for July 2003 were $4,362 million - 6.6% higher than in July 2002.

Modern Apprenticeships

Another $600,000 has been allocated for modern apprenticeships. New funding worth $650,000 was provided in the 2003 Budget, for the 2003/2004 financial year. However trainee numbers have grown rapidly with the June 2003 target of 5,000 Modern Apprentices being achieved by March 2003. By June 2003 there were actually 5,739 Modern Apprenticeships. By 30 June 2004, it is expected that there will be a total of 6,500 Modern Apprenticeships in place.

Manufacturing

Manufacturing sales volumes increased by 0.7% in the June 2003 quarter, compared with the March 2003 quarter. Seven out of 15 industries recorded increases in seasonally adjusted sales in the June 2003 quarter, compared with the March 2003 quarter. Machinery and equipment manufacturing (up $196 million), and meat and dairy product manufacturing (up $77 million) recorded the largest increases. Paper and paper product manufacturing (down $90 million) and petroleum and industrial chemical manufacturing (down $63 million) recorded the largest decreases in seasonally adjusted sales.

Migration

In the year ended August 2003 there were 96,200 permanent and long term arrivals, up 1,300 or 1% on the August 2002 year. Over the same period permanent and long-term departures fell by 3,700 or 6% to 55,100. The overall result was a net migration gain of 41,200 in the August 2003 year - 14% higher than the net inflow of 36,200 people in the previous year. Compared with the August 2002 year, New Zealand citizen departures were down 5,700 and non-New Zealand citizen arrivals were down 700. While there were significant net inflows from China (13,600), India (5,800), Japan (2,300), Fiji (2,000), South Africa (1,900) and Korea (1,700) in the year ended August 2003, these totals were all lower than for the previous August year. There was also a substantial net inflow from the United Kingdom (9,200), up 61% on the August 2002 year figure (5,700). Conversely, there was a net outflow to Australia of 9,500 in the August 2003 year, compared with net outflows of 13,100 in the August 2002 year and 29,100 in the August 2001 year.

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