CTU Economic Bulletin No. 66

CTU Monthly Economic Bulletin No. 66 (February 2006).

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Comment Can New Zealand get on track to more comprehensively adopt a Swedish economic model? There are perhaps other countries that also provide similar inspiration such as Finland and Ireland. All have their problems. And Aotearoa/New Zealand has many differences that should be preserved. Although there are very real political constraints, the concern is that our Government is simply aiming too low - and business cannot raise its sights above compliance costs and tax cuts. Sweden last year had a current account surplus, a positive trade balance, high productivity, a massive research and innovation budget, one of the most generous foreign aid budgets, high environmental standards and much more equitable income distribution than almost anywhere else in the world. Many have attempted to write off the Swedish model at times over the last 20 years during periods when they struggled to grapple with inflation, budget and trade deficits and a high exchange rate. We cannot simply import the Swedish model. It has been built up over many decades mainly due to long-term political success by the Social Democrats. But it does stand as an alternative to the neo-liberal prescription. And the point is - it is a much more compelling alternative than what we have managed so far as we claw our way out of the perils of Rogernomics. According to Robert Taylor (who was for many years a journalist with the Financial Times and now advises the European Trade Union Confederation), the key to Sweden's success (we could add Finland and Ireland in this respect also) has been the relationship between the state, the unions and a number of global corporations that practise social responsibility. It is one thing to pick one aspect of the Swedish model (such as high labour market participation of women) - but it is another to more comprehensively create the institutional arrangements, policy platform, and the economic and social environment that underpins the positive and (so far) sustainable Swedish outcomes.

Meanwhile, much of the current economic debate here is about the extent and nature of an economic slowdown. So far in 2006, we have seen lower levels of business confidence, softer retail spending figures, lower immigration and confirmation that world commodity prices are beginning to slide. The trade figures also continue to show a major deficit. Having said that, business confidence levels were low during the last 5 years in any case, retail sales still look fairly strong once car sales are taken out of the statistics, and there is strong momentum in the economy due to non-residential construction and employment growth. But in the New Year it has been noticeable that several Banks are revising their forecasts with much lower figures. For instance, the BNZ shaved a whole percent off their GDP outlook to suggest annual figures of 1.7% for 2006, 1.5% for 2007 and 2.2% for 2008. As usual there is considerable uncertainty about a number of the factors that could influence overall economic outcomes this year. For instance, the rollout of Working for Families will provide a significant boost to family incomes and this will flow through into retail sales and so forth. In addition the planned spending on infrastructure will underpin the economy to an extent. Also the strong impulse from the service sector continues. But if unemployment edges up, redundancies occur and workers lose confidence about future earnings, then domestic spending could slow and lead to a much lower GDP growth rate. The spate of highly publicised lay-off announcements so far this year is sending a considerable shock wave across the labour market but it is too early to assess the overall impact. At this stage the outlook is for an economic growth rate of around 2% for the next two years, picking up again in 2008. This is far from the recession some sections of business seem to be intent on talking us all into - but it is about the half the growth rate of the last few years.

Consensus forecasts published by NZIER (see note 1) The consensus forecasts were updated in December 2005.

(March Years)	     2006	2007 	2008
GDP                                2.5       1.9         2.8
CPI                                  3.4	     2.8	   2.6
Wages (QES)                 4.1	     3.8	   3.4
Employment                   2.1	     0.7	   1.2
Unemployment               3.7	     4.1	   4.4

Economic Snapshot

This is a snapshot of key indicators for unions. Consumer prices rose by 0.7% in the December 2005 quarter and were up by 3.2% annually. Food prices increased by 2.3% in the January 2006 year. The next CPI update is on 19th April 2006. Unemployment is at 3.6%. Maori unemployment is 7.6% and Pacific peoples at 6.2% compared with 2.5% 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 (but note below an increase in March). Ordinary time wages as measured by the Quarterly Employment Survey (see note 2) for December 2005 were up annually by 5.4% (5.1% in the private sector and 6.7% in the public sector). The QES showed that the average ordinary time wage is now $21.29 ($19.81 private, $26.99 public). The female rate of $19.52 is 85.7% of the male rate of $22.77. The Labour Cost Index shows that ordinary time wages went up by 3.1% (2.9% private, 4% public). 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 4.7% and the median increase was 3.8%. The next update of wages data is on 8th May. Economic activity (GDP) increased by 0.2% in the September 2005 quarter and 2.7% for the September 2005 year. The official cash rate set by the Reserve Bank is 7.25%.

Wages

Ordinary time wages as measured by the Quarterly Employment Survey for December 2005 were up annually by 5.4% (5.1% in the private sector and 6.7% in the public sector). The QES showed that the average ordinary time wage is now $21.29 ($19.81 private, $26.99 public). The female rate of $19.52 is 85.7% of the male rate of $22.77. The Labour Cost Index shows that ordinary time wages went up by 3.1% (2.9% private, 4% public). The average increase in the year for those who got a wage increase in the December 2005 year (60% of workers) was 5.4% (5.4% in the private sector, 5.2% public) with a median of 4% (4% in both private and public). This is a change from the previous few years when the median stayed on 3% and the average just above 4%. In the latest quarter the average for those who got an increase was 4.7% (4.8% private, 4.3% public) with a median of 3.8% (4% private and 3.3% public). One-fifth of the increases in 2005 were by more than 5% - the highest proportion since the series began in 1992. Also, the unadjusted LCI shows a 5.4% annual increase. The BNZ has recently noted that "we maintain our view that nominal wage growth will remain above 5.0% for at least the next twelve months". The next release of QES and LCI data is on 8th May.

Minimum Wage

The minimum wage goes up by 7.9% on 27th March to be $10.25 an hour. The youth minimum rate is fixed at 80% of the adult rate under current policy and that will be $8.20. Estimates are that 91,000 adults and 10,000 of those aged 16 or 17 will benefit directly from the March increase. The overall increase in the minimum wage since 1999 is now 46.4% in the adult rate and 95.2% for the youth rate.

Employment and Unemployment

In the December quarter the number of workers employed actually fell by 1000. However, employment in the December quarter of 2005 was 32,000 more than in December 2004. This shows continuing solid growth in employment but at a much lower rate than the nearly 88,000 in the previous year. Annual growth in employment was 1.5% compared with 4.4% in 2004. Unemployment is at 3.6%, which is 78,000 people. Maori unemployment is 7.6% and Pacific peoples at 6.2% compared with 2.5% for European/Pakeha. The unemployment rate is 11.7% for 15-19 year olds and 5.9% for 20-24 year olds compared with 0.9% for 55-59 year olds. Underemployment (those seeking more or more permanent hours) had fallen to less than 70,000 but is now up again at 81,500. The jobless rate (the unemployed plus those discouraged from seeking work or not available for work at the time of the survey) is at 144,800. The BNZ is picking unemployment to reach 3.9% by the end of this year and 4.3% by the end of 2007. This can be contrasted with 6.8% in 1999. This suggests that although unemployment will grow, there is still strong employment momentum in the economy.

New Data on Earnings and Worker Turnover

Statistics NZ have now made their first release of the Linked Employer Employee Data (LEED) series. This uses administrative data (such as tax information) to get more information on earnings, filled jobs, turnover etc. So far these data show that although there has been a 0.9% job growth per quarter over the last five years, the worker turnover rate per quarter was 17%. It also shows that "new hires" have earnings of 74% of existing workers.

Economic Growth (GDP)

Economic growth as measured by GDP was 0.2% in the September 2005 quarter and 2.7% for the September 2005 year compared with 4.3% in the September 2004 year. A sharp fall in residential investment, weak exports and an expansion in imports all detracted from GDP in the quarter.

Consumer Price Index

The CPI rose by 0.7% in the December quarter and 3.2% in 2005 overall. The most significant factors in the last quarter were housing, transport and food. The price increase for tradable goods and services during 2005 was 1.7% compared with 4.3% in non-tradables. I have already sent out the revised CTU Real Wage Calculator. The PPI (Producer Price Index) rose by 6.5% in 2005 with electricity price increases a major factor.

Housing

There are some signs of slowing in residential housing. The number of house sales in January was the lowest in four years and 32% below the September 2003 peak. Some are suggesting that annual house price inflation will go under 10% soon. It was 13.2% in January compared with the peak of 20%. However another survey (Quotable Value NZ) put annual house price inflation at 16.8% so we are still seeing very significant pressures in the housing sector. Houses are still 6.6 times annual disposable income - way up from the level of between 3 and 4 that we had only a few years ago. And rents have increased by 4.2% in the year to September 2005, on top of 6.6% increase in the previous year.

Trade

The trade deficit for the year to January 2006 was $7.1 billion, which as a percentage of exports (23%) is the largest deficit for a January year since 1976 and way up on the average for the last decade of 7.8%. Spending on imports shot up during the year to $37.9 billion dollars, driven partly by the higher price of oil. In contrast, export earnings fell marginally to $30.8 billion. So imports were up by $3 billion, but exports were down by $172 million. In January itself, New Zealand recorded a trade deficit of $935 million, the equivalent of 42.6% of exports. As a percentage of exports, the deficit is almost four times as large as the average trade deficit for January over the past decade. Commodity prices slipped again in January to make it the 8th consecutive monthly drop. A lower dollar may cushion the impact of this price fall. However, we now have a huge volume imbalance between imports and exports. And the current account deficit is 8.5% of GDP in the year ended September 2005, compared with 6% in September 2004.

Government Finances

The financial statements for the first 6 months show that the operating balance is at $4.4 billion ($1.6 billion above forecast) and the OBERAC was $3 billion ($214 million above forecast). There are some one-off factors in the higher-than-forecast operating balance and we may now be seeing the beginning of a lower surplus. Latest tax revenue is down on Treasury forecasts.

Work Stoppages

There were 50 work stoppages ending in the September 2005 year, and 19 in the September 2005 quarter. This is the highest annual figure since 1997. In the September 2005 year, there were 17 stoppages in manufacturing, 7 in transport and storage, 4 in Government administration, 5 in education, 7 in health and community services and 10 in all other sectors combined. There were 21 public sector and 29 private sector stoppages.

Retail

Retail sales (seasonally adjusted) fell by 0.4% in the December 2005 quarter but once vehicle sales are removed there was a 1.4% increase.

Migration

In the year ended December 2005, there were 79,000 permanent and long-term arrivals, down 1,500 (2%) on the December 2004 year. Over the same period, departures increased by 6,600 (10%) to reach 72,000. The overall result was a net migration gain of 7,000 in the December 2005 year, which is 54% lower than the net inflow of 15,100 people in the previous December year. Last year there was a net inflow of 9,600 from the United Kingdom, up 6% on the December 2004 year figure (9,000). There were also increased net inflows from Fiji (2,400), Germany (1,400), Samoa (1,200) and South Africa (1,200). In contrast, there were reduced net inflows from India (1,900), Japan (1,600) and China (1,100), down from net inflows of 2,400, 2,000 and 2,800, respectively, in the previous year. Overall, net inflow from Asia has reduced, from 23,800 in the December 2003 year, to 6,800 in the December 2005 year. There was a net outflow to Australia of 21,400 in the December 2005 year, an increase of 6,700 (45%) compared with the previous December year, and a net outflow of 700 to Korea.

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

Note 1 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.

Note 2 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.