CTU Economic Bulletin No. 68

CTU Monthly Economic Bulletin No. 68 (April 2006).

Download PDF version here (48 kb).

Comment

There is more than the usual level of conjecture at the moment about the state of the economy. Are we in a recession? When will the Reserve Bank start to cut interest rates? How soon will export returns pick up? When will the effect of higher petrol prices feed through to impact on consumer spending generally and economic growth? As usual, these are not easy questions to answer. It doesn't look like we are in a recession as forecasts suggest a positive GDP figure for the March 2006 quarter (and maybe also a revision of last quarter). Latest figures on exports and retail sales do not imply a recession either. The employment growth figures in early May will be an important indicator of momentum in the economy. But as Treasury puts it "growth has slowed earlier and more rapidly than expected".

The Reserve Bank certainly wants everyone to believe there will be no cash rate cut until April next year. They are worried about a relatively long period of inflation above 3% influencing ongoing expectations. But many economists think a rate cut by December is still on the cards. The Reserve Bank is meant to "look through" the impact of higher oil prices. This means the OCR would not increase, but "looking through" does not appear to extend to making rate cuts despite a spike in inflation. We still seem to have a scenario where our relatively high interest rates compared with other countries means the supply of funds is kept high. Of course there are all sorts of lags in monetary policy but it is hard to work out why we remain on a cash rate of 7.25% when inflation is 3.3% yet Australia is at a cash rate of 5.5% (175 basis points lower) when their inflation is 3% - just a bit lower than here.

There are early signs of a lift in exports. Also export volume growth has been reasonable. But a sustained increase based on the lower dollar will take some time to wind back some of the massive annual trade deficit of over $7 billion.

Higher petrol prices have numerous effects. The most direct is that households, firms and so forth are all spending more on fuel. Then the cost of that in many cases is passed on, so prices for other goods and services rise. Higher fuel costs mean that expenditure on other items is reduced and this will also impact on some sectors. There will be some switching to public transport. But at a more general level the impact is higher inflation for an initial period, and then lower economic growth as the higher fuel costs dampen economic activity. Higher fuel costs affect cash flow and could then impact on investment and hiring decisions.

The Budget is due on 18th May. In some respects the major Budget 2006 announcements were made before the election. The additional spending on Working for Families, and interest free student loans will soak up a fair amount of the extra spending. Michael Cullen has said that "restraint would be the watchword for Budget 2006". We can however expect to see some profile given to expenditure that results from confidence and supply agreements with other Parties. And the demands for investment in skills and infrastructure will need to be a key focus for the Government if we are to keep up the momentum on economic transformation. The big discussion on the business tax review designed "to ensure that the tax system provides better incentives for productivity gains and improved competitiveness with Australia" will kick off in the middle of the year.

Meanwhile, the current account deficit is 8.9% of GDP compared with 2.8% in 2001. $10.8 billion of the $13.7 billion deficit is on the investment income side. The current account deficit has widened by $9 billion in 3 years. Our international investment position is that we are a net debtor to the tune of $136.5 billion. This has increased by $10.5 billion since December 2004. Statistics New Zealand noted last year on one occasion (footnote 1) that "the main factors contributing to the wider year-ended current account deficit were an increase in income payable to foreign investors in New Zealand (due to higher reported profits), and an increase in the imports of goods". This high level of private debt arises from housing mortgages being financed offshore, high levels of foreign ownership of firms in New Zealand, and low savings in New Zealand due to low wages, and inadequate superannuation arrangements. The mix of government decisions around such areas as KiwiSaver, business tax, and financing of infrastructure needs to ensure that our vulnerability in terms of overseas debt is improved - not worsened.

Consensus forecasts published by NZIER (footnote 2)
The consensus forecasts were updated in March 2006.

(March Years)      2006      2007       2008

GDP                    2.3        1.4          2.4           

CPI                    3.4         2.8          2.4   

Wages (QES)       4.1         4.1          3.4

Employment         1.9         0.5          1.0

Unemployment      3.8         4.4          4.6

Economic Snapshot

Consumer prices rose by 0.6% in the March 2006 quarter and were up by 3.3% annually. Food prices increased by 1.8% in the March 2006 year. The next CPI update is on 17th July 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 $10.25 for those aged 18 years and over and $8.20 for 16/17 year olds and trainees. Ordinary time wages as measured by the Quarterly Employment Survey (footnote 3) 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) decreased by 0.1% in the December 2005 quarter and was up by 2.2% for the December 2005 year. The official cash rate set by the Reserve Bank is 7.25%.

Consumer Price Index

The annual CPI figure is now running at 3.3%. The March 2006 quarter increase was 0.6%. The annual increase of 3.3% included a 23.5% rise in petrol prices and a 5.9% increase in the cost of new houses. The CPI on tradables was 2.1% annually compared with the non-tradable component at 4.1%. The likely impact of higher oil prices and the more general impact of a lower dollar on imported inflation have resulted in revised forecasts for CPI. Most are now picking that it will increase to an annual figure of 3.6% when the next announcement occurs on 17th July and remaining above 3% for all of 2006 and most of 2007. The BNZ think a peak of 4% cannot be ruled out. The September release is now delayed until 25th October because the CPI is being re-weighted and updated.

Tax Comparisons

The latest OECD analysis of the tax wedge shows that New Zealand is third lowest for single workers. The wedge is a measure of the difference between labour costs to an employer and the net take-home pay of an employee, including any cash benefits from Government welfare programmes. The tax wedge for a single NZ worker is 20.5% compared with Australia at 28.3%, UK at 33.5%, USA at 29.1% and the OECD average of 37.3%. A single person without children on two-thirds of the average wage has a tax burden of 18.9% in NZ, the third lowest in the OECD, where the average is 33.7%. In Australia, the tax wedge for someone on two-thirds of their average wage is 24.8%. A "single-earner married couple" with two children on average earnings had a tax wedge of 14.5% in 2005, down from 18% in 2004. This should fall further with the roll out of the Working for Families package. The comparable figure for Australia in 2005 was 16%.

Government Finances

After 8 months of the Government financial year, the operating surplus is $6.6 billion, $2.7 billion above forecast due to the gain on sale of Southern Hydro by Meridian Energy, slightly lower core Crown expenses than forecast, and higher than expected investment gains from NZ Superannuation Fund, Earthquake Commission and Government Superannuation Fund. The OBERAC (Operating Balance Excluding Revaluations and Accounting Changes) was $4.7 billion ($752 million above forecast).

Trade

Trade figures show a lift for March this year, but the overall figures for the last year are still dismal. The monthly trade balance for March 2006 was a surplus of $59 million - the first surplus since May 2004. Exports for the month were 13.8% higher than for March 2005 mainly due to increases in exports of milk powder, butter and cheese. Imports for March 2006 were 4.6% higher than in March 2005, with fuel imports the main factor. For the year ended March 2006, exports were $31,097 million, almost unchanged from the previous March year. Despite this small change there were large increases and decreases in commodity values. The largest increases were for milk powder, butter and cheese (up $270 million), preparations of cereals, flour and starch (up $176 million), and petroleum and petroleum products (up $138 million). The largest decreases were for meat and edible offal (down $275 million), fruit (down $175 million), and logs, wood and wood articles (down $127 million). Exports for the March 2006 year increased to Australia but exports to the USA, UK and Japan all decreased by 5% or more. Imports for the year ended March 2006 were $38,169 million, up $2,723 million (7.7%) from the previous March year. Crude oil and petroleum products (up $1,129 million), and aircraft and parts (up $1,020 million) recorded the largest increases. Partly offsetting these increases was a decrease in the value for vehicles (down $360 million). Imports from China were up by $719 million and from the USA by $638 million. The trade balance for the year ended March is a deficit of $7,072 million (22.7% of exports), which is the largest annual deficit ever recorded for a March year. Imports of capital goods for the March quarter 2006 did not increase on the March 2005 quarter and intermediate goods imports fell. This is not a good sign in terms of business investment.

Housing

Quotable Value's house price index rose by 14.8% in the March 2006 year. This means that the rate of increase in house prices is slowing. But an increase of 15% or so is little comfort for those struggling to buy a home. The average sale price in Auckland city over the last year was $510,117 and property values in Hamilton increased by 25.1% in that period. However, the Real Estate Institute of New Zealand applies a different method of calculation using sales reported by real estate agents rather than the later reports from Territorial Authorities. They state that the national median house price went up in the last year by a much lower 7.7% and that the median house price was $302,000. It has been estimated that the average house price is 22% higher than the median house price. Quotable Value use average house prices but REINZ figures are based on median prices. (For those that need reminding the average is the total value of houses sold divided by the number of houses sold wheras the median is the halfway price between the highest price and the lowest). The average price is skewed up by those really expensive houses! Meanwhile for the year ended March 2006, the total value of consents issued for all buildings was $10,731 million, down $250 million (2%) from the March 2005 year. Consents for residential buildings fell $369 million, while consents for non-residential buildings rose by $119 million.

Retail Sales

Retail sales were up by 1.9% for February 2006. The consensus forecast was for 0.3% which means that either sales were a lot higher than predicted or the statistic is wrong - or a bit of both. It was such a contrast to the January figure that there must be some concern about accuracy so a revision could be in store when the next release is out. But the figure does suggest that income growth and employment are holding up so far and this is assisting retail sales. The retail figures also point to a positive first quarter GDP (the BNZ pick is 0.4% which although a relatively low figure avoids any suggestion of a recession). And, credit card billings data for March rose 2.8% in the month, building on the gains already seen in January and February.

Industry Training

The total number of Industry Trainees as of 31 December 2005 was 161,676 which is 22,079 more than 2004, a 16% increase. The number of Modern Apprentices was 8,388 which is 1,213 more than 2004, a 17% increase.

Work Stoppages

The level of work stoppages increased to 53 in 2005. While still a low number compared with 562 in 1977, it is the highest number of stoppages since 1996. However, 53 disputes is a very small number when we consider that there are 2500 collective agreements in place. The 53 stoppages last year comprised 19 in manufacturing, 6 in education, 6 in transport and storage, 8 in health and community services and 14 in all other industries combined.

Migration

In the year ended March 2006, there were 80,100 permanent and long-term arrivals, up 2,100 on the March 2005 year. Over the same period, departures increased by 2,300 to reach 70,400. The overall result was a net migration gain of 9,700 in the March 2006 year - 3% lower than the previous year. In the year ended March 2006, there was a net inflow of 10,300 from the United Kingdom, up 16% on the March 2005 year figure (8,900). There were also increased net inflows from Fiji (2,400), Germany (1,400), South Africa and Samoa (both 1,200). In contrast, there were reduced net inflows from India (2,000), Japan (1,700) and China (1,300), down from net inflows of 2,200, 1,900 and 1,500, respectively, in the previous year. The net inflow from Asia reduced from 17,700 in the March 2004 year, to 7,500 in the March 2005 year, and then increased slightly to 7,700 in the March 2006 year. There was a net outflow to Australia of 20,700 in the March 2006 year, an increase of 3,500 (21%) compared with the previous March year, and a net outflow of 600 to Korea.

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

Footnotes:

1) Media Statement, 21 September on release of Balance of Payments and International Investment Position (June 2005 quarter).

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.

3) 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.