CTU Economic Bulletin No. 58

April, 2005

Comment

Are we on the edge of an oil crisis? No one likes to contemplate such apocalyptic scenarios. But, Colin Campbell (who helped to found the London-based Oil Depletion Analysis Centre was chief geologist for Amoco, a vice-president of Fina, and has worked for BP, Texaco, Shell, ChevronTexaco and Exxon) calculates that about 944 billion barrels of oil has so far been extracted, some 764 billion remains extractable in known fields or reserves, and it is estimated that a further 142 billion remains to be discovered. If he is right then oil production has peaked - but there will be plenty around for quite some time. But if oil production declines steadily at about 2-3% a year, the cost of everything from travel, heating, agriculture, trade, and anything made of plastic rises. And the scramble to control oil resources intensifies. We know what that means!

Of course, these figures are contested. The International Energy Agency (IEA) believes that oil will peak between 2013 and 2037. What is agreed however is that world oil demand is surging. The IEA says developing countries could push demand up 47% to 121 million barrels a day by 2030. According to the IEA, demand rose faster in 2004 than in any year since 1976. Chinas oil consumption, which accounted for a third of extra global demand last year, grew 17% and is expected to double over 15 years to more than 10 million barrels a day - half the USA's present demand. Indias consumption is expected to rise by nearly 30% in the next five years. Treasury predictions last December were for oil being at US$43 per barrel by March 2005 and falling. But oil prices hit $US56 a barrel this month and Goldman Sachs bank, the biggest trader of energy derivatives, said prices could spike above $US100 in 2008. Oil prices have climbed around 25% this year.

The Greens are advocating for vehicle fuel efficiency standards, more investment in public transport powered by renewables, along with greater use of rail for freight and passengers, and encouragement of walking and cycling. They also want to see more local production so we are less dependent on long-distance overseas trade for relatively low-value commodities. No doubt these solutions will be debated. But the Greens do have a point. There is mounting evidence that reliance on oil is going to become more and more expensive and any strategic approach to economic development needs to factor in contingencies for this.
Meanwhile the 2005 Budget is on 19th May. The Minister of Finance is signalling that although this Budget has a significant amount of new spending, future Budgets will be scaled back. It will be interesting to compare the level of new spending in the 2005 Budget with the fiscal cap of $6.125 billion for 2000-2003. The December 2004 Budget Policy Statement indicated new spending of $2.1 billion in 2005/06, $2.2 billion in 2006/07 and $2.4 billion thereafter. This adds up to a total of $13.1 billion in new spending over the 3 years from 2005-2008, more than double the figure for 2000-2003. The Budget Policy Statement said that initiatives in relation to savings would be in addition to these figures. Health and education will account for a big proportion of new spending but details on workplace savings and depreciation will be key features also.

Economic Snapshot

This is a snapshot of key indicators for unions. Consumer prices rose by 0.4% in the March 2005 quarter and were up by 2.8% annually. Food prices increased by 1.1% in the March 2005 year. The next CPI update is on 14th July. Unemployment is at 3.6%. The minimum wage is $9.50 for those aged 18 years and over and $7.60 for 16/17 year olds and trainees. Ordinary time wages as measured by the Quarterly Employment Survey for December 2004 were up annually by 2.1% (1.9% in the private sector and 2.8% in the public sector). The average ordinary-time-hourly wage as measured by the QES is $20.19. For the private sector it is $18.85 and for the public sector it is $25.30. For females it is $18.55, for males $21.56. The Labour Cost Index (for December 2004) showed private sector wages up 2.4% for the year, with public sector wages up by 2.5%. 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% and the median increase was 3%. The next update of wages data is on 6th May. Economic activity (GDP) increased by 0.4% in the December 2004 quarter and 4.8% for the December 2004 year. The official cash rate set by the Reserve Bank is 6.75%.

Consensus forecasts published by NZIER

Period March 2006 year March 2007 year
CPI 2.8 2.6
Wages (QES) 3.6 4.0
Unemployment 3.8 4.2

Wage Increases behind Schedule!

On 6th December, 2000, the Reserve Bank (Don Brash was Governor at that time) said that "Further evidence of a tight labour market and prospective wage pressure is to be found in reported skill shortages in the economy....... Historically, wage growth rises about a year and half after an increase in the reported difficulty of finding skilled labour". On that basis, expectations were for wages to rise more markedly by around May 2002. Three years later, many are still waiting.

State Sector Pay

A recently released Treasury report said that over the last 5 years across the core public service, health and education sectors, there has been an overall increase of 8% in wage costs per year on average. This has been due to a 14% increase in those employed in the non-state trading State sector, increases in wages through injections to baselines rather than reprioritisation, and the effect of the first tranche of State Sector Retirement Savings Scheme. Total employees in the state sector have gone from 245,200 in May 1999 to 278,831 in September 2004. In the Budget-funded sector employment costs went up by 7% last year - 3% due to more workers and 4% from higher wages. In core public service and education the increase was 12% with 8% from employment and 4% from wages. I would assume that some of the 4% is explained by composition (new employees coming in on above average pay rates) and some by people moving into higher brackets (to the extent this is not offset by turnover and some people coming in at lower pay rates). But some of it obviously is from percentage wage increases. Treasury have said that key pressures on the wage bill in the core public service, health and education sectors will continue over the next 3-5 years as: the size of the State sector continues to grow; wage pressures increase due to key settlements or in response to labour shortages, and; regulatory changes impact such as the Holidays Act, the pay and employment equity policy, and a potential expansion of the State Sector Retirement Savings Scheme.

A New Job?

A survey by Hays of 600 job candidates found that lack of career progression is the main reason for a change of job. The ten most common reasons given were: Lack of career progression; Seeking new challenges; Salary; Lack of training or development opportunities; Poor management; Too much stress; Travel time too great; Seeking to specialise in a particular field; Poor work/life balance, and; Office politics.

Government Finances

Government finances after 8 months of the financial year show a cash surplus of $2.4 billion ($0.4 billion higher than forecast). The operating balance was $6.4 billion, which was $1.8 billion higher than forecast. The OBERAC (operating balance excluding revaluations and accounting changes) was $5.8 billion ($1.1 billion ahead of forecast). Gross debt was $35.1 billion (24.0% of GDP). Net debt was $12.5 billion (8.6% of GDP).

Trade

Imports continue to surge. In the month of March imports rose 9.3% in value from year earlier levels. Adjusting for the effect of a high dollar, this equates to an increase of 17.2%. The estimated trade balance for March 2005 is a deficit of $192 million, or 6.9% of exports. The average March trade balance for the previous 10 years is a surplus of $149 million or 5.9% of exports. The provisional value of merchandise imports for the year ended March 2005 is $35,457 million, up 9.6% compared with the year ended March 2004. The largest increases were for crude oil and petroleum products; mechanical machinery and equipment; electrical machinery and equipment; and vehicles, parts and accessories. Imports from Australia, China, Singapore, Taiwan and Japan showed the largest increases from the previous March year. Export returns have benefited from higher commodity prices but have been hit hard by the high dollar. However, it is hard to see the commodity prices going much higher in the near future, so the trade deficit could worsen even further as imports continue to rise and export returns decline. Meanwhile the current account deficit has reached an estimated 6.7% of GDP in the year to the March quarter. This compares with a low of 2.5% for the year ended December 2001.

Retail Sales

Total actual retail sales for February 2005 were $4.53 billion, 7.0% higher than in February 2004. The monthly increase of 1.7% in February's retail sales was far stronger than the 0.6% gain expected and followed the 1.5% gain of January. This suggests that although economic growth is slowing as the effect of the high dollar and high interest rates start to bite, retail sales continue to grow. The familiar dual economy pattern is emerging again for a period.

Unemployment

The number of people receiving Unemployment Benefit numbers has fallen by 62% since 1999 saving the Government $1.2 billion. The overall number of working-aged New Zealanders on benefits is down to 292,000 - 21% fewer than in 1999 and the first time the figure has been below 300,000 in 16 years. Unemployment Benefit numbers have fallen by more than 20,200 over the past year and now stand at less than 55,000 - the lowest figure in nearly 20 years. In total there are more than 85,000 fewer people on the Unemployment Benefit than there were five years ago.

Skill Shortages in Trades

The Department of Labour has published skill shortage assessment reports on 16 trade occupations. They are useful reports and can be viewed at http://www.dol.govt.nz/publications/jvm/job-ad-trades.asp.

Paid Parental Leave

At a cost of $8 million a year, more than 2000 self-employed workers a year will get PPL from mid-2006. So far, 45,000 workers have taken paid parental leave (under the Government scheme) since 2002.

Housing

Although many predict slower growth in house prices, the median house price increased 16% in the year to March to a record high of $280,000. Provincial areas showed particularly strong growth, with house prices in Taranaki rising 46% in the year to March. The total value of consents issued for all buildings in March 2005 was $1,159 million, up 15% compared with March 2004. Meanwhile, the rural property median price for March was down from $1,030,000 in February to $952,500. But dairy property prices are still on the rise. Over the last 3 years, the March median rural property price has gone from $695,000 in March 2003 to $706,000 in 2004 and now $952,500.

Migration

In the year ended March 2005, there were 78,100 permanent and long-term arrivals, down 9,400 (11%) on the March 2004 year. Over the same period, departures increased by 8,600 (14%) to reach 68,100. The overall result was a net migration gain of 10,000 in the March 2005 year, which is 64% lower than the net inflow of 28,000 people in the previous March year. There was a net inflow of 8,900 from the UK, down 14% on the March 2004 year figure (10,300), and a net inflow from Fiji (2,000). There were reduced net inflows from India (2,200), Japan (1,900) and China (1,500), down from net inflows of 4,100, 2,100 and 7,400 respectively, in the March 200 year. Overall, net inflow from Asia has reduced, from 17,700 in the March 2004 year, to 7,500 in the March 2005 year. There was a net outflow to Australia of 17,200 in the March 2005 year, an increase of 6,100 (56%), compared with the previous March year.

GSF Changes

Extra funding of about $3.5 million a year will be in the Budget in response to proposals from the Government Superannuitants Association and the New Zealand Railway Superannuitants Association. All GSF annuitants will receive inflation adjustments to their pensions of at least 90% of the CPI increase. This will benefit 15,774 people who were on a lower increment rate. Also, there will be provision to make permanent arrangements protecting the surviving spouses of GSF annuitants against income loss as a consequence of the 1990 changes to the tax treatment of superannuation schemes. This will benefit 2,692 people immediately and a further 17,879 potentially.

Work Stoppages

There were 34 work stoppages in the December 2004 year consisting of 27 complete strikes, six partial strikes and one lockout. The 34 stoppages involved 6,127 workers. This is an increase on the 28 stoppages recorded in the December 2003 year. Although the number of work stoppages has increased relative to the previous year, the losses both in estimated wages and salaries and in loss of person-days of work have decreased to their lowest level for a December year since the series began. There were 21 private sector and 13 public sector stoppages. Of these, 13 were in manufacturing, 3 in transport and storage, 3 in education, 3 in health and 4 in other industries.

Population Projections

New Zealands European population is projected to reach 3.23 million by 2021, an increase of 150,000 or 5% over the estimated resident population at 30 June 2001 of 3.07 million. New Zealands M?ori population is projected to reach 760,000 by 2021, an increase of 170,000 or 29% over the 2001 figure of 590,000. New Zealands Asian population is projected to reach 670,000 by 2021, an increase of 390,000 or 145% over the 2001 figure of 270,000. New Zealands Pacific population is projected to reach 420,000 by 2021, an increase of 160,000 or 59% over the 2001 figure of 260,000.

International Education

Although the growth in offshore student approvals peaked in late 2002, international education was worth $2.188 billion in foreign exchange earnings to New Zealand during the 2003/04 year, slightly under the $2.211 billion from the year before.

Travellers Spend Up

New Zealanders away on overseas trips of less than one year spent $3.0 billion in the year ended 30 June 2004. Approximately 82% of expenditure was attributed to personal (non-business) travel, while 18% was for business-related travel. Forty-one percent of all expenditure by New Zealand travellers occurred in Australia, for the year ended June 2004. The next-highest levels of spending were 10% in both the UK and the USA.

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