CTU Economic Bulletin No. 70
CTU Monthly Economic Bulletin
No. 70 (June 2006)
Download a printed version here (PDF file, 95 kb).
Comment
Both Alan Bollard and Michael Cullen have recently made comments about the impact large wage increases could have on inflation. The concern has been that if workers seek full recovery of the impact of higher petrol prices, then these secondary effects will push inflation even higher. With some forecasts of 1.1% inflation for the June 2006 quarter (which would lift annual inflation to 3.5%) against a backdrop of a slower economy and a recognition that the next move in interest rates has to be down, it is no surprise that we are hearing such exhortations. Nonetheless, they miss the point which is that if we are to address our structural problem of low wages, we need wages to rise every year by more than the rate of inflation. The issue is how to achieve this. And in any case, why target workers rather than employers and retailers?
A wage increase can be inflationary in a number of ways. It could force businesses to increase prices to recover the cost of a wage increase. Or the additional income generated by higher wages could lead to higher demand for goods and services ? which may result in price increases. But it is clearly recognised that wage increases are not inflationary in a cost-push sense if they are paid for partly out of profits, and also if they reflect some productivity increases. We know that corporate profits increased by 44% from 2000 to 2004. They may have slowed a bit since then but not by much when we look at some of the reported profits. We also know that labour productivity increased by 2.6% a year on average from 1988 to 2005. That also slowed a bit as employment growth surged in the last few years.
The target for inflation (for the Reserve Bank) is to keep consumer price increases over the medium term between 1% and 3% a year. At the risk of oversimplifying things, we can readily see that wage increases of 5% to 7% (for example) can have an inflationary impact of less than 3% if normal labour productivity gains apply and workers get a fair share of the lift in profits. Calling for wage restraint is pointless when our wages are 35% lower than Australia, and when wage increases above the rate of inflation are essential if this situation is ever to change.
Meanwhile our current account deficit is now at $14.5 billion for the last year, 9.3% of GDP. Much of the commentary about this situation has focussed on our low savings, reliance on overseas investment, and our appetite for imports. But this obscures the fact that the $11.2 billion deficit on the income side of the current account mainly consists of bank borrowing to fund home mortgages as well as profits being retained by overseas owners. In fact, income on foreign equity was a huge $7.6 billion which means that over half of our current account deficit is due to profits made by foreign investors. The irony is that because we have privatised so much, and allowed foreign investors to own many strategic assets, when the economy does well and profits are up, our current account deficit can actually worsen. There is a technical issue in how to interpret the deficit when reinvested earnings from overseas firms are recorded as an outflow in the investment income account and an inflow in the capital account. But the point is, in a low wage economy, when workers are struggling to afford housing (and therefore take out large mortgages on a long term basis), and when overseas owned firms are making significant profits, our current account deficit is always going to be ugly. Our low wages contribute both to low savings and high overseas debt.
It is only when we have the trifecta of a low NZ dollar, high commodity prices, and high export volumes that we seem to get down respectable current account deficit levels. So although the solution is to focus on boosting exports, and also lift our savings rate, we have to address the problems caused by high levels of overseas ownership. This means that we need to encourage more joint ventures, resist any further privatisation, leverage investment into areas which will underpin sustainable economic development and look for opportunities for domestic ownership including a role for SOEs. A recent speech (see note 1) by Trevor Mallard, Minister of Economic Development, noted the concern that we have become a 'branch economy'. The Minister questioned the limited extent to which we have as a country leveraged a dividend from foreign investment. He said that we have invested in intellectual property 'but it is not there to plunder'. He spoke instead of a 'benefit-sharing' model of foreign investment.
Next time the current account deficit is under the media spotlight, I hope we hear more criticism of our model of foreign investment and see a closer focus on the reasons for our investment income deficit, and the role of high profits by overseas owned firms rather than the usual stories about too much consumption of imports, and the failure of individuals (on relatively low wages) to save.
Consensus forecasts (see note 2) published by NZIER
The consensus forecasts were updated in June 2006.
(March Years) 2006 2007 2008
GDP 2.1 1.3 2.4
CPI 3.3 3.4 2.5
Wages (QES) 4.1 4.1 3.6
Employment 2.5 0.5 0.7
Unemployment 3.9 4.5 4.7
Economic Snapshot
Consumer prices rose by 0.6% in the March 2006 quarter and were up by 3.3% annually. Food prices were up by 1.8% in the May 2006 year. The next CPI update is on 17th July 2006. Unemployment is at 3.9%. Maori unemployment is 8.7% and Pacific peoples' unemployment is at 7.6% compared with 3.2% 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 (see note 3) for March 2006 were up annually by 5.3% (4.6% in the private sector and 7.8% in the public sector). The QES showed that the average ordinary time wage is now $21.59 ($19.94 private, $28.45 public). The female rate of $19.97 is 87.1% of the male rate of $22.92. The Labour Cost Index shows that ordinary time wages went up by 3.2% (3.0% private, 4.0% 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 4.6% and the median increase was 3.9% (the average for the year was 5.4% and the median was 4.1%). The next update of wages data is on 7th August. Economic activity (GDP) increased by 0.7% in the March 2006 quarter and was up by 2.2% for the March 2006 year. The next GDP update is on 29th September, 2006. The official cash rate set by the Reserve Bank is 7.25%.
New Figures show numbers in first 90 days in a job
New figures from Statistics New Zealand using the Linked Employer-Employee Data series shows the high proportion of workers who at any one time are in the first 90 days of a job. They indicate that on 31st March 2004, there were 241,887 people who had held their job at that time for less than 3 months. While the figures show that a higher proportion of young people are in this situation, on average just under one in every seven workers is in their first 90 days of a job at any one time.
Age Percentage with tenure of less than 3 months
15-19 29.6
20-24 23.8
25-29 17.7
30-34 14.4
35-39 12.7
40-44 11.4
45-49 10.1
50-54 9.2
55-59 8.7
60-64 8.9
65 + 13.8
Total 14.9
Economic Growth
The economy grew by 0.7% in the March 2006 quarter after a 0.1% decrease in the last quarter of 2005. Annual growth in GDP was 2.2%. The Government sector, construction and agriculture recorded the strongest growth in the March 2006 quarter along with consumer spending and a rebound in inventories. But investment fell by 1.4%. The recession doomsayers have been proved wrong, but it does show that the economy has slowed significantly with the consensus forecasts suggesting that annual GDP growth will drop to 1.3% in the March 2007 year.
Skill Shortages Ease
There has been an 8% drop in job vacancies over the last year and the latest Manpower (sic) Employment Outlook Survey has also indicated a reduction in hiring intentions. But this still means that there are major labour shortages. It is just that the level of shortages is easing. Also of note is that in 14 trades monitored, the number of people achieving qualifications has almost doubled from 1600 in 2001 to 3000 in 2005.
Property
Residential property values increased by 12.4% over the past year. This is down from the 13.1% reported in April. The average New Zealand sale price was $327,779. The increases vary across the regions however with Auckland region prices up 9.8%, Hamilton 21.5%, Christchurch 12.7%, Dunedin 8.2%, Wellington 13.6%, Nelson 3.5%, Invercargill 15.5%, Whangarei 24.3% and New Plymouth 11.0%. Meanwhile the seasonally adjusted value of work put in place on non-residential buildings rose 10.6% in the March 2006 quarter.
Trade
There was a trade deficit of $104 million for May 2006. Although exports rose to $3.6 billion, the highest on record for any month, imports jumped to $3.7 billion, mainly driven by spending on aircraft and oil. Over the past decade the average trade balance for May has been a surplus of $274 million. The trade balance for the year is in deficit to the tune of $6.9 billion. The trade-weighted exchange rate in May was 11.6% lower than it was in May 2005. Meanwhile, the prices received for New Zealand?s commodity exports on international markets, according to the ANZ's World Index, rose 2.3% in May.
Unemployment Benefit Numbers
At the end of May the numbers on the unemployment benefit had decreased to 41,000 which is 9,000 fewer people receiving the unemployment benefit than at the same time a year ago, and means there are 120,000 fewer people receiving the unemployment benefit now compared with 1999.
Government Accounts
The operating balance of $9.4 billion for the 10 months to end of April 2006 was close to the forecast. The OBERAC (see note 4) was $7.4 billion, which was $1.9 billion lower than the operating balance, reflecting the removal of Meridian Energy?s gain on sale of Southern Hydro, net investment gains on the asset portfolios held by the NZS Fund, ACC, EQC and GSF and net foreign exchange gains by the Reserve Bank, Debt Management Office and NZS Fund and liability revaluations of GSF and ACC. Core crown cash flow from operating and investing activities was $3.2 billion. This represents $45.6 billion of receipts (including tax receipts of $43 billion) being utilised on: operating payments including finance costs of $25.1 billion; and subsidies and transfer payments (e.g., NZ Superannuation and Unemployment benefit) of $12.4 billion, giving a cash flow from operating activities of $8.1 billion. This was then used to fund: contributions to the NZS Fund for partially funding future NZS payments of $1.9 billion; purchase of physical assets (e.g. prisons, schools) of $1.4 billion; and other investment activity (including hospitals, housing, student loans and Reserve Bank reserves) of around $1.5 billion.
Retail Sales
April retail sales were up by 1.5% only on April 2005 although supermarket sales were up by 7.3%. Growth in overall sales in the last year was 3.1% - a drop from this time last year when the corresponding figure was 7%.
The rich get richer
In the USA, latest figures show that the average CEO earned 821 times as much as a minimum wage worker. This is a big lift from 1978 when chief executives were paid 'only' 78 times as much. The huge ratio of 821 reflects not only the extraordinary growth of CEO pay but also the falling value of the federal minimum wage which has not been raised since 1997.
Cheaper to live in NZ?
A Mercer survey which ranked the cost of living in major cities showed Auckland at 100, Wellington at 150, but Sydney was ranked 19th.
Migration
In the year ended May 2006, there were 79,900 permanent and long-term arrivals, up 1,100 on the May 2005 year. Over the same period, departures decreased by 300 to reach 69,700. The overall result was a net migration gain of 10,200 in the May 2006 year, which is 16% higher than the net inflow of 8,800 people in the previous May year. In the year ended May 2006, there was a net inflow of 10,400 from the United Kingdom, up 12% on the May 2005 year figure (9,300). There were also increased net inflows from Fiji (2,300), Germany (1,400) and South Africa (1,300). In contrast, there was a reduced net inflow from India (2,000), down from a net inflow of 2,100 in the previous year. The net inflow from Asia reduced from 15,400 in the May 2004 year, to 7,000 in the May 2005 year, and then increased slightly to 8,100 in the May 2006 year. During the past 12 months, the annual net outflow to Australia was 20,400.
For further information contact Peter Conway on 04 802 3816 or peterc@nzctu.org.nz
Note 1 - 21 June to Hugo Group.
Note 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.
Note 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.
Note 4 - Operating balance excluding revaluations and accounting changes.
