CTU Economic Bulletin No. 65

CTU Monthly Economic Bulletin No. 65 (November 2005).

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Comment

You do have to wonder about business sentiment. On a regular basis we get these surveys revealing business pessimism. We don't have equivalent surveys of worker and union sentiment. I suspect that if the last 5 years of economic growth, low unemployment, strong fiscal surpluses, sharply reducing government debt and robust company profits had been under a National Government, business leaders would be crowing about a golden period. Despite the World Bank saying for the second year in a row that New Zealand is the best place in the OECD for "ease of doing business" NZ firms complain about compliance costs. Despite the Bank of New Zealand saying this month that "New Zealand's corporate sector has been on an incredible roll in recent years", business lobbyists are now complaining about profit margins being squeezed. The evidence shows that debt/equity ratios have been reduced in these years and certainly some firms have been investing in new plant and machinery. But the real worry is - have firms in general not been using the good times from over 5 years to reinvest to sustain themselves and lay the basis for continued modernisation and improvements in productivity? It doesn't sound like it.

At the first hint of a slowing economy to perhaps an annual rate of slightly above 2% rather than the current 3% and previously above 4% levels, we get such pessimism from business leaders. They could be taken more seriously at this time when things are taking a turn for the worse if they had not been so pessimistic for much of the last 5 years while things have been booming. Sure - things are going to get harder. And there are real issues such as the high dollar that are hurting some sections of the business sector. Profit levels are likely to drop. Treasury advocacy for another dose of Rogernomics hasn't helped sentiment either. After backing a National Party victory and anticipating tax cuts, we appear to have a business community adopting a 2000 style reaction to the new Government. This time it is not that the top tax rate is going up, ECA being scrapped and ACC being renationalised - just that the large tax cut scenario, labour market deregulation, and attacks on the state sector were pipped at the post on 17th September. So the Xmas message to the business sector is - be less pessimistic and start investing some of those reserves and higher profits into better wages, more technology, skills development and so on. And although we know that the economy is slowing there is no need to talk it down even further.

Meanwhile, monetary policy is currently an exercise in frustration. With part of inflation coming from higher consumption fuelled by increased housing equity, it is a real problem that the effect of lifting interest rates has such a muted impact on household consumption. Although there has been some commentary that house prices are rising a bit more slowly this year, the annual increase is still around 17%. Treasury and RBNZ are looking at other tools which can operate in addition to the OCR to control inflation - particularly from the household sector. These could include restrictions on the percentage of lending, higher capital adequacy ratios, and different rules for overseas lending. In such a deregulated financial market it seems unlikely that such measures would arise. But the temperature has been rising in exchanges between the Government and the RBNZ on the one hand and Australian owned banks on the other. Watch this space.

The operation of monetary policy is full of contradictions such as putting up interest rates to reduce domestic consumption but making the NZ dollar more attractive in the process which hurts the export sector, impacts on savings, and promotes further speculative activity. The lift in the NZ dollar this week is an example of this as speculators anticipate another lift in interest rates next week. Higher interest rates can simply add to bank margins, and if the spike in inflation is due to imported inflation through (say) higher oil prices, then there is not much point trying to slow the economy as a reaction and also create a lot of uncertainty about monetary policy, rather than set a more constant OCR. The official cash rate is likely to lift by 0.25% on 8th December. A 0.50% increase is possible but would be a surprise. However after December, there is much more less likelihood of further rises and the higher dollar must be making the Reserve Bank pause for thought. There is a risk that with all the concern about the housing sector and frustration at the limited impact of monetary policy, the Reserve Bank puts up the OCR enough to force a hard landing in the economy. Hopefully, the Reserve Bank will after this next increase, do no worse than sit on 7.25% for a considerable period.

I will do my next Bulletin in February 2006.

Economic Snapshot

This is a snapshot of key indicators for unions. Consumer prices rose by 1.1% in the September 2005 quarter and were up by 3.4% annually. Food prices increased by 1.1% in the October 2005 year. The next CPI update is on 18th January 2006. Unemployment is at 3.4%. Maori unemployment is 9.1% and Pacific peoples at 5% compared with 2.2% for European/Pakeha. 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 (note 1) for September 2005 were up annually by 4.3% (3.8% in the private sector and 6.6% in the public sector). The average ordinary-time-hourly wage as measured by the QES is $21.13. For the private sector it is $19.71 and for the public sector it is $26.70. For females it is $19.44 which is 86.2% of the male rate of $22.54. The Labour Cost Index (for September 2005) showed private sector wages up 2.8% for the year, with public sector wages up by 3.7%. The key statistic for unions to note probably is that the LCI shows that where there were wage increases in the last measured quarter, the average rate of increase was 4.5% and the median increase was 3.5%. The next update of wages data is on 8th February. Economic activity (GDP) increased by 1.1% in the June 2005 quarter and 3.1% for the June 2005 year. The official cash rate set by the Reserve Bank is 7%.

Consensus forecasts (note 2) published by NZIER

The consensus forecasts were updated in late September. Compared with the last set of forecasts they show a lower track for GDP and wages and a higher track for CPI. The next set of consensus forecasts are in late December.

Period   % increase March 2006 yr   % increase March 2007 yr
GDP	          2.2	                           2.1
CPI	          3.5	                           2.7
Wages (QES)	  3.2	                           3.3
Unemployment	  4.0	                           4.4

Wages

Wages data came out on 8th November. Ordinary time wages as measured by the Quarterly Employment Survey for September 2005 were up annually by 4.3% (3.8% in the private sector and 6.6% in the public sector). The QES showed that the average ordinary time wage is now $21.13 ($19.71 private, $26.70 public). The female rate of $19.44 is 86.2% of the male rate of $22.54. The LCI shows that ordinary time wages went up by 3% (2.8% private, 3.7% public). The average increase in the year for those who got a wage increase in the September 2005 year (60% of workers) was 5.1% (5.2% in the private sector, 4.9% public) with a median of 3.8% (3.8% private, 3.4% public). But in the latest quarter the average for those who got an increase was 4.5% (4.8% private, 3.7% public) with a median of 3.5% (4% private and 3% public).

There is also an experimental unadjusted LCI series which some economists are now regarding as a more accurate measure of wage increases. This shows wage growth of 5.7% in the year to September 2005. This is up from 4.5% and 4.4% in 2004 and 2003 respectively.

Employment and Unemployment

There are now 2,093,000 New Zealanders in employment. The number of people in work rose by 1.3% or 26,000 people in the September 2005 quarter. Since March 2000, employment has risen by 16.8% or 301,000 people. Unemployment is at 3.4%. Maori unemployment is 9.1% and Pacific peoples 5% compared with 2.2% for European/Pakeha. The unemployment rate is 12.4% for 15-19 year olds and 5% for 20-24 year olds compared with 1.5% for 50-54 year olds.

Underemployment (those seeking more or more permanent hours) has fallen significantly to 67,300 compared with about 106,000 two years ago. The jobless rate (the unemployed plus those discouraged from seeking work or not available for work at the time of the survey) is down another 9,000 or so to 132,200 compared with the actual number of unemployed at 73,000.

Trade

Total imports were up 5.5% in the three months to October. Comparing the October 2005 year with the previous year merchandise imports are up by 8% and exports are up by 1.6%. But imports of consumption goods were up by 17% for the year. The current account deficit is now at 8% and rising. The trade balance for the year ended October 2005 is a deficit of $6,117 million (19.9% of exports). The annual trade balance has been in deficit since the year ended August 2002. The New Zealand dollar is now 3.8% higher than in October 2004. As I have previously pointed out, although the relative drop on exports compared with imports is a real worry, by far the greatest part of the current account deficit is on the investment income side because of borrowing offshore to fund housing mortgages and repatriation of profits to foreign owners of NZ companies.

Price Indices

Producer input prices rose 2.9% increase during the September quarter and 6.1% for the year (mainly dues to fuel and electricity prices. Output prices were up by 1.8% in the quarter and 4.1% for the year. This suggests ongoing inflationary pressures and some absorption of cost increases by firms. The capital goods price index rose 3% for the September year mainly reflecting price increases in the construction sector.

Retail Trade

Annual growth in retail sales was 4.9% for the September year, down from 5.9% for the June year.

Housing

The median house price increased 1.7% in the month to be 16.8% higher than a year ago. Meanwhile, housing turnover remained relatively strong but with some volatility - down 8% in October but up 5% in September and nearly 4% from a year ago.

Crown Accounts

Government accounts for the first 3 months of the financial year (July-September) show an operating balance of $2,667 million ($1,321 million higher than forecast) with an OBERAC of $1,880 million ($534 million higher than forecast). Meanwhile, for the year ended 30 June, 2005 there was an annual surplus of $8,099 million in its current account. This is $2,419 million higher than the result for the June 2004 year, an increase of 42.6%. The higher surplus was due to a 10.1% rise in current income exceeding a 5.6% rise in current expenditure. Total current income for the June 2005 year was $51,424 million, an increase of $4,728 million on the previous year.

Taxation revenue made the most significant contribution to this increase, up $4,273 million. This reflects growth in the economy over the year, along with increased employment and some wage growth. Revenue from income tax was $32,067 million, up $3,549 million from $28,518 million in the June 2004 year. Company income taxes increased by $1,599 million (24.5%), and taxes on individual income increased by $1,476 million (7.4%). Withholding tax increased by $474 million. Taxes on production and imports increased by $724 million (4.8%) in the June 2005 year to $15,688 million. This increase was largely the result of a $444 million rise in GST revenue. Total current expenditure increased by 5.6% in the June 2005 year, taking the level from $41,016 million in the previous year to $43,325 million.

Population

The estimated resident population of New Zealand was 4,107,400 at 30 September 2005. The population increased by 34,900 (0.9%) in the September 2005 year, compared with 48,300 (1.2%) in the September 2004 year.

More businesses

The number of non-farming businesses increased 3.1% (to 334,340) in February 2005 compared with February 2004. There were 334,340 New Zealand businesses in February 2005. This is an increase of 3.1% from February 2004, following a 9.9% increase in the previous year. The boost in business numbers came from property and business services (up 3,970), followed by construction (up 2,680). Property and business services was the industry with the largest number of businesses, representing over a third of all enterprises in New Zealand

The manufacturing sector was the largest employer, with approximately 268,200 employees in February 2005. New Zealand businesses had 1.73 million employees in February 2005. Almost two-thirds of the total growth in business numbers in February 2005, compared with 2004, was in enterprises with one to five employees. Ninety-six percent of non-farming businesses had fewer than 20 employees, but in total this group accounted for less than a third of all New Zealand employees. Less than 1% of enterprises in New Zealand had 100 or more employees, but this group accounted for 47% of all employees in New Zealand.

Migration

In the year ended October 2005, there were 79,000 permanent and long-term arrivals, down 2,300 (3%) on the October 2004 year. Over the same period, departures increased by 8,600 (13%) to reach 73,000. The overall result was a net migration gain of 6,000 in the October 2005 year, which is 65% lower than the net inflow of 17,000 people in the previous October year. The number of people coming to live permanently in New Zealand has fallen steadily since the middle of 2003 because of tighter immigration rules, fewer New Zealanders returning home and more moving overseas. In the year ended October 2005, there was a net inflow of 9,400 from the United Kingdom, up 2% on the October 2004 year figure (9,300). There were also increased net inflows from Fiji (2,400), Germany (1,300), South Africa (1,100) and Samoa (1,000). In contrast, there were reduced net inflows from India (2,000), Japan (1,600) and China (1,000), down from net inflows of 2,600, 2,000 and 3,400, respectively, in the previous year. Overall, net PLT inflow from Asia has reduced, from 26,600 in the October 2003 year, to 5,900 in the October 2005 year. There was a net outflow to Australia of 21,100 in the October 2005 year, an increase of 7,200 (52%) compared with the previous October year, and a net outflow of 1,100 to Korea.

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

Notes

1) The QES as a measure has "compositional problems" meaning that if there is more employment of workers in a higher than average wage part of the labour market, this shows up in the QES as an increase in average wages. So the labour cost index is a better measure. However, it tends to miss increases in pay due to promotion or new job categories.

2) Average of forecasts from NZIER, Berl, ANZ- National Bank, ASB Bank, BNZ Bank, First New Zealand Capital, Deutsche Bank, UBS, Westpac, Reserve Bank of New Zealand, and Treasury.