CTU Economic Bulletin No. 43

November, 2003

Comment

Two key causes of concern in the economy at the moment are housing costs and the high dollar. They underlie the tensions of a two-speed economy with a strong domestic economy and a weaker export sector. They also pose a problem for the Reserve Bank under pressure to increase interest rates to try to dampen the housing sector, and to (at least) hold the official cash rate at 5% to protect the NZ dollar against any greater financial speculation forcing up the dollar even higher. Many banks are forecasting increases in the official cash rate starting either December this year, or in 2004 to lift the OCR to 5.75% or 6%.

There are many good reasons not to increase interest rates at the moment. Although house price inflation is high (17% for the year), overall inflation is still 1.5% which is well within the 1-3% target range for the Reserve Bank. Also, although the main impact on the NZ dollar is from overseas, a further interest rate rise will attract more speculation on the dollar (if you are in Japan you know that interest returns on your money will be nearly 5% higher in NZ dollars than the yen). The TWI (NZ dollar compared with a trade weighted index of overseas currencies) is running about 4% ahead of Reserve Bank expectations and has leapt by 4.5% in about a month. We have had a tight labour market for 2 years, and as yet, no real sign of this resulting in inflationary wage pressures. In addition, migrant inflows are much lower. The year to May 2003 was 42,000. But estimates for the May 2004 year are more like 27,000. Another factor to note is that housing supply is being boosted at a record rate.

Set against that there are signs that exports may be slowly improving and the world growth outlook improving. Also, although the housing pressures may be easing, we could still be in for another year at least of quite high increases in house prices. This is not only loading up debt levels, but is also excluding many people from home ownership. This is particularly difficult for first-home buyers and those shifting from a region that has experienced low house price inflation to one where prices are not only historically higher but where the gap is growing daily. The Council of Christian Social Services, in their latest report on poverty indicators, describe the effect of house prices driving rent increases for foodbank clients.

There have been some calls for the Reserve Bank and the Government to look at ways of lowering the high dollar. Michael Cullen could have been playing with a small incendiary device on 5th November when he suggested that the Government had some options to reduce the dollar. He got the expected reaction from those horrified at the thought of the Government intervening directly in the currency market. We need to go back to the mid-1990s to find a time when the Reserve Bank sold about $200 million to influence the exchange rate.

I suspect, however, that Michael Cullen's options may have more to do with the issuing and timing of government bonds and the role of Treasury's debt management office. Or he may have hoped to simply talk down the dollar a bit as we saw briefly in late September when he made a similar remark about the high dollar to a London audience. He might also be tempted to point out that we have a rising current account deficit, used over 20% of export revenue in the last year just to pay interest on overseas debt, and lose about $7 billion each year overseas in dividends and capital repayments. In other words, in terms of fundamentals, our economy is not that sound.

But most economists acknowledge that there is not a lot an economy the size of New Zealand (0.2% of world GDP) can do in a floating exchange rate r?gime when the US dollar is falling in value. Maybe Michael Cullen should look at some bolder options. A capital gains tax would be a much more effective policy instrument in the housing market. Although it would take the heat off interest rates, it would be a hard option to "sell" to many of the voting public. Another option is incentives for retirement savings which could, apart from the intrinsic value of such an approach, also attract investment away from housing and reduce consumption. It could also make funds available for productive investment. A financial transactions tax could reduce the appetite for currency speculators. So there are options - from the minimal approach of talking down the dollar, to a bolder approach such as a capital gains tax.

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 the overall export sector, due to a high dollar, is winding down from previously high levels in 2001 and 2002 that were caused by a coincidence of high commodity prices and a lower than average exchange rate. Consumer prices rose by 0.5% in the September 2003 quarter and are up by 1.5% in the September 2003 year. Food prices fell by 0.3% in the October 2003 year. Unemployment is at 4.4%. Meanwhile, ordinary time wages as measured by the Quarterly Employment Survey (September 2003) were up annually by 3% in the private sector and 3.1% in the public sector. The Labour Cost Index (September 2003) showed private sector wages up 2.1% for the year, and public 2.9%. 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 3.6% 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%.

Wages

The Labour Cost Index (LCI) recorded an increase of 0.8% in salary and wage rates (including overtime) from the June 2003 quarter to the September 2003 quarter. This is the largest rise since the series began in the December 1992 quarter. On an annual basis, salary and wage rates (including overtime) were 2.3% higher than in the September 2003 quarter, following increases of the same size for the March 2003 and June 2003 quarters. Public sector salary and ordinary time wage rates rose 1.0% in the September 2003 quarter, and were 2.9% higher than in the September 2002 quarter. Private sector salary and ordinary time wage rates rose 0.6% in the September 2003 quarter, and were 2.1% higher than in the September 2002 quarter. Not surprisingly, carpenters and joiners recorded an annual increase of 4.1%, the largest rise in this occupation since the series began in the December 1992 quarter.

As I have mentioned in previous Bulletins, perhaps the key statistic for unions to note is the Labour Cost Index information on average and median increases in wages. This excludes from the data the effect of those workers who got no increase in this period so gives a better idea of the trend in actual pay increases for those getting/negotiating an increase at that time. The median (i.e. middle) increase recorded for all surveyed salary and ordinary time wage rates that rose from the September 2002 quarter to the September 2003 quarter was 3.1%. The average increase was higher, at 4.4%. Looking at the latest quarter, the median increase of surveyed salary and wage rates that rose from the June 2003 quarter to the September 2003 quarter was 3.0%, and over the same period the average increase was 3.6%. Of the private sector salary and ordinary time wage rates that rose in the September 2003 quarter, the average increase was 3.7%, compared with 4.2% in the June 2003 quarter. Eighteen percent of surveyed private sector salary and ordinary time wage rates recorded an increase in the September 2003 quarter. Of the public sector salary and ordinary time wage rates that rose in the September 2003 quarter, the average increase was 3.2%, compared with 2.5% in the June 2003 quarter. Thirty-three percent of surveyed public sector salary and ordinary time wage rates recorded an increase in the September 2003 quarter.

The Quarterly Employment Survey for the September 2003 quarter showed a 0.5% increase for private sector wages (3% for the year) and a public sector increase of 2.6% for the quarter and 3.1% for the year. Note that these figures are affected by compositional changes within and between industries. The average ordinary time hourly wage is $19.59. The female rate is $17.94, 85.6% of the male rate at $20.97. The private sector average rate was $18.44 while the public sector average hourly wage was $24.27.

Unemployment

Unemployment is now at 4.4%. This means there are 88,000 unemployed, 19,000 fewer than in September 2002. Employment increased by 26,000 in the September quarter and was up by 51,000 full-time jobs and 10,000 part-time jobs in the year. The jobless rate is 151,000 and underemployment (those wanting additional hours) was 104,300. Unemployment among M?ori was 9.7% with 6.6% for Pacific peoples, and 3.3% for P?keh?.

Government Finances

The Budget Policy Statement is due (along with the December Economic and Fiscal Update) on 18th December. That should give a further indication of Government budget intentions around family support, childcare subsidies, early childhood education and other areas. The forecast for the 2003/04 Budget year is for a surplus of $3.8 billion. However, in the first 3 months of the financial year (to 30th September) the operating surplus was at $1.2 billion, $730 million up on the forecast for that period.

Health Board Deficits

Health Board deficits stood at $5.1 million for the September quarter. This was significantly down on the $43 million deficit for the June quarter and reflects a $65 million increase in funding from the Ministry of Health.

CPI

The next update in consumer prices is due on 20th January 2004. Food prices rose by 0.3% in October but fell 0.3% for the year. Meanwhile, producer prices (both input and output) rose by 0.4% in the September quarter. Electricity generation and supply price increases were the strongest factor. Farm input prices fell by 0.4% due to lower interest rates and reduced prices for cattle, deer and sheep. Capital goods prices rose 0.2% for the quarter and 0.7% for the year. The rising cost of construction materials was the main factor in the quarterly increase.

Trade

Exports are down by 6.1% for the year. The goods deficit is $701 million for October. This is equivalent to 30.2% of exports. Although trade deficits have always occurred in October months this is the highest deficit as a percentage of exports for 14 years. The current account is estimated at 4.7% and a trade deficit of $3.22 billion is estimated for the October 2003 year. The ANZ's commodity price index shows a rise of 3.3% in October and 10% in the last year. The quarterly rise reflects increases in dairy, lamb, kiwifruit, and sawn timber and log prices. But once the effect of a higher dollar is factored in, returns actually fell by 10% compared with a year earlier. Meanwhile Ports of Auckland say container volumes are up by 7% for the October 2003 year.

Housing and Construction

Building permits have reached their highest level in 13 years and the annual rate of house price inflation is 17%. Dwelling consents were down 10.5% in October but this is due to a drop in the apartment consents. Once they are excluded, the consents rose 5.7% for the month and were nearly 29% higher than a year ago. On the farm, the national median farm price for October 2003 was $650,000 up from $600,000 in October 2002. The increase in housing activity is also showing up in employment and business statistics with an increase of 9.2% in FTE employment in house construction in the year to February 2003, an 11.5% increase in real estate agents, and 4.3% in firms involved in house construction.

Retail

Retail sales were up by 2.3% in the September 2003 quarter. Sales were 5.8% higher than the September 2002 quarter.

Migration

In the year ended October 2003 there were 94,900 permanent and long-term arrivals, down 600 or less than 1% on the October 2002 year. Over the same period permanent and long-term departures fell by 2,500 or 4% to 55,600. The overall result was a net migration gain of 39,300 in the October 2003 year - 5% higher than the net inflow of 37,500 people in the previous year. Compared with the October 2002 year, New Zealand citizen departures were down 4,900 and New Zealand citizen arrivals were up 2,600. In contrast, non-New Zealand citizen arrivals were down 3,200 and non-New Zealand citizen departures were up 2,500. There were significant net inflows from China (12,400), India (5,200), Japan (2,300), Fiji (1,900), South Africa (1,700) and Korea (1,500) in the year ended October 2003. There was also a substantial net inflow from the United Kingdom (10,000), up 72% on the October 2002 year figure (5,800). Conversely, there was a net outflow to Australia of 9,600 in the October 2003 year, compared with net outflows of 12,800 in the October 2002 year and 27,100 in the October 2001 year.

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