CTU Economic Bulletin No. 44

January, 2004

Comment

The economic outlook for 2004 is dominated by a small number of key factors. The Government remains in a very strong fiscal position and has foreshadowed a higher level of new expenditure in 2004 and onwards including a package to assist those on low incomes. The high dollar is offsetting slightly better export prices and is keeping imported inflation low. House prices are likely to rise at a slower pace (due to lower immigration and a lift in housing construction) than the horrendous 20% increase in 2003, but will still be a major source of concern. Some however are predicting an actual fall in house prices in some areas. The interest rate debate will continue to sway mainly between the effect of the high dollar on the one hand, and house price inflation on the other. The recent decision to increase the official cash rate to 5.25% could exacerbate the speculation on the NZ dollar and push it up even further damaging export returns. The dollar rose 10% against the US dollar in the last 3 months alone. Inflation remains at 1.6% - well within the 1 to 3% band for the Reserve Bank to consider over the medium term.

It is a concern when the tight labour market is given as a reason for increasing interest rates. Certainly unemployment is low, there are skill and labour shortages, and in construction there are signs of higher labour costs. Also, wage increases tend to lag considerably in response to labour shortages. But we have had a tight labour market for 2 years or so. Some economists were predicting that this would result in wage inflation back in 2002. In general, wages have only risen modestly. In any case, there is no evidence that wage rises have been inflationary.

In terms of the outlook for this year, there will of course be many economic and related issues which will come up for debate. The New Zealand Herald has gone to considerable lengths to give business lobby groups masses of column inches to complain about labour market regulation. In the dark days of the 1990s, we never saw the same level of interest in the plight of workers and unions! So we can expect the Employment Relations Law Reform Bill to feature, as well as the minimum wage. There will be a much stronger policy focus on productivity and enhancing the growth and innovation framework. Also, there is the possibility of more advances in workplace retirement savings. State sector pay issues and also the recommendations on pay and employment equity will be of significant interest.

But there are always the unpredictable or hard-to-estimate factors. Will a drought develop? How big will be the drop in farm incomes from the high dollar and what will the flow-on effects be? Will another SARS (or similar) come along? Will rising energy costs damage the economy? Will our high private sector debt affect economic stability?

For unions, it is important that we maintain our consistent message of how to build a high wage and high skill quality economy. Our advocacy around economic development, sustainable development, fairness in terms of distribution of economic growth, investment in education and skills and so forth - has made a significant contribution to economic debate, and decision-making. It is a message put forward by many, many unionists so is not confined to lofty economic commentators. Keep it up!

Economic Snapshot

This is a snapshot of key indicators for unions. Consumer prices rose by 0.7% in the December 2003 quarter and are up by 1.6% overall in 2003. Food prices rose by 0.6% in 2003. 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 by 1.5% in the September 2003 quarter and 3.9% for the September 2003 year. The official cash rate set by the Reserve Bank is 5.25%.

CPI

The CPI rose by 0.7% in the December 2003 quarter and by 1.6% from the December 2002 quarter to the December 2003 quarter. This follows rises of 1.5% in the year to September 2003 and also in the year to June 2003. Of the nine groups in the CPI, seven have recorded increases from the December 2002 quarter. The most significant upward contributions came from the housing group (up 6.6%), the tobacco and alcohol group (up 2.9%), the household operation group (up 1.5%), and the personal and health care group (up 2.4%). Less significant upward contributions came from the recreation and education, food and credit services groups. Downward contributions came from the transportation and apparel groups. The annual increase in the CPI was strongly influenced by price increases in the purchase and construction of new dwellings (up 8.5%). The most significant annual decrease was a 16.3% fall in prices for international air travel. I have sent out an updated CTU Real Wage Calculator, and have attached to this Bulletin a table on CPI increases for the last 16 years.

Growth

GDP growth increased by 1.5% in the September 2003 quarter and 3.9% in the September 2003 year. Internal demand rose 3.5%, with household spending up 2.4% and business investment up 2.9%. Export volumes declined, down 2.0%, with falls in exports of services and dairy products the main contributors. Imports rose 0.8% in the quarter, with machinery and equipment imports increasing 5.2%.

Government Finances

The Budget Policy Statement was announced (along with the December Economic and Fiscal Update) on 18th December. The main feature was confirmation that some of the Budget surplus is to be directed towards a package to assist low-income workers, low-income families and more funding for early childhood education. The BPS also stated that Budget measures will make housing more affordable for low-income families and single adults, but no details were given. The BPS (in the part on fiscal risks) acknowledges the financial implications of possible improvements in paid parental leave, health sector wage negotiations and pay and employment equity taskforce recommendations. The Government has ditched the self-imposed fiscal cap on new expenditure it had in the 1999-2002 term (about $6.2 billion) and is now prepared to contemplate new expenditure of about $13 billion from 2004/5 to 2007/8. Despite this, strong fiscal surpluses are maintained.

Trade

The current account deficit continues to edge up and is now around 5% of GDP. Because of the large fiscal surpluses, this is not causing the concern it should. The preliminary December merchandise trade balance came in much worse than expected with a deficit of $506 million mainly due to a higher level of imports. The December deficit at 22% of exports was four times the average recorded for the past 10 December months. The annual deficit was $3,400 million (12% of exports value). Export volumes are estimated to have grown by 8% last year, but the high dollar meant returns fell. Ports of Auckland note that full import container volumes were up by 5% but full export container volumes increased by a smaller 1% for the 12 months to end-December 2003.

Work Stoppages

Nine work stoppages ended in the September 2003 quarter. In comparison, the September 2002 quarter had 11 work stoppages. Twenty-nine work stoppages ended in the September 2003 year, involving 5,074 employees with losses of 19,896 person-days of work, and an estimated $4.3 million in wages and salaries. In comparison, 38 work stoppages involving 35,381 employees ended in the September 2002 year, resulting in losses of 55,870 person-days of work, and an estimated $8.2 million in wages and salaries. Health and community services recorded eight of the 29 work stoppages in the September 2003 year. Five stoppages were recorded in manufacturing and three in transport and storage. The transport and storage industry recorded the most number of employees involved. The manufacturing industry had the highest loss in salaries and wages, and recorded the highest loss of person-days of work. Fifteen private sector stoppages and 14 public sector stoppages ended in the September 2003 year.

Bankruptcies

Despite all the comments about pressures on small businesses, the rate of bankruptcy and liquidation is much lower than in the 1990s. There were 3003 bankruptcies and 509 company liquidations in 1999. By 2003, this had fallen to 2672 bankruptcies (down 11%) and 152 company liquidations (down 70%).

Housing and Construction

Consents were issued for 3,032 new dwelling units in November 2003 - the highest November monthly total since 1973. With house price increases averaging about 20% last year, there are very significant concerns about further increases. It is likely that house prices will rise at a slower pace this year (and a number of economists are warning of an actual fall in house prices in some areas). This is because population growth is slowing sharply as the net inflow of migrants falls. Over the six months to November, the net rate of arrivals has dropped from 3,650 per month to 1,020 (seasonally adjusted). In addition to any increase in mortgage rates, there is also a noticeable lift in housing supply. The number of new dwelling consents over the last 12 months was almost 30,000, a 26-year high. So, if demand is likely to fall, and supply is rising, then house prices should ease. If house prices rose by 10% in 2004, half as much as 2003, that is little comfort for workers getting (say) a 3% wage increase. Although the cost of household items has been falling due to the high dollar, that is not much help if the cost of a house to put the items in has spiralled beyond reach. The New Zealand Home Affordability Index declined 5.9% in the December quarter, as the increase in median dwelling prices offset a slight fall in interest rates. Looking at just December, real estate records show that the national median price fell from $235,000 to $229,000 from November to December. Meanwhile the farm median price rose to $950,000 for December, well up on $725,000 in November and $755,000 in December 2002.

Employment

The ANZ job ads survey showed that nationwide, advertisements placed in major newspapers were up about 18 percent on the usual levels for December.

Retail

Retail sales were down 0.4% for November from October 2003.

Migration

In the year ended November 2003 there were 93,400 permanent and long-term arrivals, down 2,600 or 3% on the November 2002 year. Over the same period permanent and long-term departures fell by 1,200 or 2% to 56,700. The overall result was a net migration gain of 36,800 in the November 2003 year - 4% lower than the net inflow of 38,200 people in the previous year. Compared with the November 2002 year, New Zealand citizen departures were down 4,100 and New Zealand citizen arrivals were up 2,400. In contrast, non-New Zealand citizen arrivals were down 5,000 and non-New Zealand citizen departures were up 2,900. There were significant net inflows from China (11,700), India (5,000), Japan (2,200), Fiji (1,900), South Africa (1,600) and Korea (1,300) in the year ended November 2003. There was also a substantial net inflow from the United Kingdom (10,000), up 67% on the November 2002 year figure (6,000). Conversely, there was a net outflow to Australia of 9,900 in the November 2003 year, compared with net outflows of 12,500 in the November 2002 year and 26,200 in the November 2001 year.

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

ANNUAL INCREASES IN C.P.I.

Year to March 1987 18.3
Year to June 1987 18.9
Year to September 1987 16.9
Year to December 1987 9.6

Year to March 1988 9.0
Year to June 1988 6.3
Year to September 1988 5.6
Year to December 1988 4.7

Year to March 1989 4.0
Year to June 1989 4.4
Year to September 1989 7.2
Year to December 1989 7.2

Year to March 1990 7.0
Year to June 1990 7.6
Year to September 1990 5.0
Year to December 1990 4.9

Year to March 1991 4.5
Year to June 1991 2.8
Year to September 1991 2.2
Year to December 1991 1.0

Year to March 1992 0.8
Year to June 1992 1.0
Year to September 1992 1.0
Year to December 1992 1.3

Year to March 1993 1.0
Year to June 1993 1.3
Year to September 1993 1.5
Year to December 1993 1.4

Year to March 1994 1.3
Year to June 1994 1.1
Year to September 1994 1.8
Year to December 1994 2.8

Year to March 1995 4.0
Year to June 1995 4.6
Year to September 1995 3.5
Year to December 1995 2.9

Year to March 1996 2.2
Year to June 1996 2.0
Year to September 1996 2.4
Year to December 1996 2.6

Year to March 1997 1.8
Year to June 1997 1.1
Year to September 1997 1.0
Year to December 1997 0.8

Year to March 1998 1.3
Year to June 1998 1.7
Year to September 1998 1.7
Year to December 1998 0.4

Year to March 1999 -0.1
Year to June 1999 -0.4
Year to September 1999 -0.5
Year to December 1999 0.5

Year to March 2000 1.5
Year to June 2000 2.0
Year to September 2000 3.0
Year to December 2000 4.0

Year to March 2001 3.1
Year to June 2001 3.2
Year to September 2001 2.4
Year to December 2001 1.8

Year to March 2002 2.6
Year to June 2002 2.8
Year to September 2002 2.6
Year to December 2002 2.7

Year to March 2003 2.5
Year to June 2003 1.5
Year to September 2003 1.5
Year to December 2003 1.6

QUARTERLY INCREASES IN C.P.I.

Quarter to March 1987 2.3
Quarter to June 1987 3.3
Quarter to September 1987 1.6
Quarter to December 1987 2.1

Quarter to March 1988 1.8
Quarter to June 1988 0.8
Quarter to September 1988 0.9
Quarter to December 1988 1.2

Quarter to March 1989 1.1
Quarter to June 1989 1.2
Quarter to September 1989 3.5
Quarter to December 1989 1.2

Quarter to March 1990 0.9
Quarter to June 1990 1.8
Quarter to September 1990 1.0
Quarter to December 1990 1.1

Quarter to March 1991 0.6
Quarter to June 1991 0.1
Quarter to September 1991 0.4
Quarter to December 1991 -0.1

Quarter to March 1992 0.4
Quarter to June 1992 0.3
Quarter to September 1992 0.3
Quarter to December 1992 0.3

Quarter to March 1993 0.1
Quarter to June 1993 0.6
Quarter to September 1993 0.5
Quarter to December 1993 0.2

Quarter to March 1994 0.0
Quarter to June 1994 0.4
Quarter to September 1994 1.2
Quarter to December 1994 1.2

Quarter to March 1995 1.2
Quarter to June 1995 1.0
Quarter to September 1995 0.2
Quarter to December 1995 0.6

Quarter to March 1996 0.5
Quarter to June 1996 0.8
Quarter to September 1996 0.6
Quarter to December 1996 0.7

Quarter to March 1997 -0.3
Quarter to June 1997 0.1
Quarter to September 1997 0.5
Quarter to December 1997 0.6

Quarter to March 1998 0.2
Quarter to June 1998 0.5
Quarter to September 1998 0.5
Quarter to December 1998 -0.8

Quarter to March 1999 -0.3
Quarter to June 1999 0.2
Quarter to September 1999 0.4
Quarter to December 1999 0.2

Quarter to March 2000 0.7
Quarter to June 2000 0.7
Quarter to September 2000 1.4
Quarter to December 2000 1.2

Quarter to March 2001 -0.2
Quarter to June 2001 0.9
Quarter to September 2001 0.6
Quarter to December 2001 0.6

Quarter to March 2002 0.6
Quarter to June 2002 1.0
Quarter to September 2002 0.5
Quarter to December 2002 0.6

Quarter to March 2003 0.4
Quarter to June 2003 0.0
Quarter to September 2003 0.5
Quarter to December 2003 0.7