CTU Economic Bulletin No. 73
CTU Monthly Economic Bulletin Either read on, or download a printable version here (PDF file, 81 kb) Comment
No. 73 (September 2006)
The recent dispute between Australian-owned Progressive Enterprises and its workers at distribution centres in Auckland, Palmerston North and Christchurch, has focused attention on the growing Australian ownership of New Zealand companies.
In 2005 the Overseas Investment Office considered $2.4 billion of net new investment from Australian firms in New Zealand – more than seven times as much as the next biggest net investor, the United States. As at 31 March 2006 Australia accounted for 50.5 per cent of foreign direct investment in New Zealand.
That amount has more than doubled since 2001 with the proportion of all Australian FDI that flows into New Zealand rising from 7.6 per cent to 15.9 per cent. Currently something is making Australian investment in New Zealand very attractive.
In the New Zealand Herald a couple of weeks back, columnist Fran O’Sullivan noted that, “even some of our more free-market minded business people are now concerned at how quickly this country is becoming an Australian branch office.” Among the negative effects she identified were more and more business support work (research and development, financial and legal services) being done on the other side of the Tasman, cultural differences over the way New Zealand companies are run, and a disincentive for foreign-owned firms to develop new export markets.
Add to that the impact on our current account deficit and the loss of profits from New Zealand and it paints a pretty grim picture.
In another article later in the month, the Herald quoted a top Australian recruitment consultant describing New Zealand as a “training ground” for regional managers in Australia being groomed for national management back home. That outlook appears to pervade a range of activity by Australian-owned firms here – New Zealand is only an add-on to their core business in Australia and firms are free, if not freer, to push the boundaries of acceptable corporate behaviour over here. The lockout at Progressive Enterprises and the ANZ Bank’s approach to Feltex are both good examples.
There is also an argument that the larger size of the Australian economy and the more confrontational nature of industrial relations in Australia, particularly with recent law change, may mean Aussie owners are more “rough and tumble” in their approach and behave more heavy-handedly towards their workers.
As Associate Minister of Economic Development David Cunliffe noted in a speech to Auckland University at the beginning of the month,”if foreign investors have come here only to secure a raw material resource supply, or to serve a portion of their global market, the spin-offs for New Zealand will be limited.” Workers at Progressive’s distribution centres would agree.
But just as relevant as spin-offs, is the direct loss of profit. Right now we have a particularly high current account deficit ¬– $15.2 billion for the year to June 2006. By far the biggest part of that deficit comes from a deficit on investment income ¬– $11.9 billion or about 78 per cent. That investment income deficit is made up of two things: bank borrowing (to fund mortgages and imports New Zealand hasn’t saved for) and profits going out of the country to foreign investors. Of the two, approximately $7.6 billion dollars left the country in profits to foreign investors. (see note 1)
The effect on interest rates and the value of the New Zealand Dollar, as well as the risk to New Zealand’s economic stability, make the deficit a big worry. To date there has been more concern about the contribution of bank borrowing loans. But as foreign investment in New Zealand continues to grow, and investment from Australia grows bigger and faster than from anywhere else, it may be time to consider the real cost of Aussie ownership. And that is the loss of profit that could be fuelling the economic transformation of New Zealand.
Consensus forecasts (see note2) published by NZIER
The consensus forecasts were updated in September 2006.
2006
2007
2008
GDP
1.5
2.2
3.2
CPI
3.8
2.5
2.1
Wages (QES)
4.2
3.5
3.1
Employment
0.9
0.9
1.5
Unemployment
4.3
4.7
4.6
Economic Snapshot
Consumer prices rose by 1.5 per cent in the June 2006 quarter and were up by 4 per cent annually. Food prices were up by 3.4 per cent in the August 2006 year. The next CPI update is on 25 October 2006. Unemployment is at 3.6 per cent. M?ori unemployment is 8.2 per cent and Pacific peoples’ unemployment is at 5.9 per cent, compared with 2.4 per cent for European/P?keh?. The minimum wage is $10.25 for those aged 18 years and over and $8.20 for 16 to 17-year-olds and trainees. Ordinary time wages, as measured by the Quarterly Employment Survey (QES) for June 2006 (see note 3), were up annually by 4.4 per cent (4.9 per cent in the private sector and 2.0 per cent in the public sector). The QES showed that the average ordinary time wage is now $21.84 ($20.39 in the private sector, $27.45 in the public sector). The female rate of $20.06 is 86.1 per cent of the male rate of $23.30. The Labour Cost Index (LCI) shows that ordinary time wages went up by 3.3 per cent (3.0 per cent in the private sector, 4.2 per cent in the public sector). Probably the key statistic for unions to note is that, where there were wage increases in the last measured quarter, the average rate of increase was 4.9 per cent and the median increase was 4.0 per cent (the average for the year was 5.4 per cent and the median was 4.2 per cent). The next update of wages data is on 6 November. Economic activity (GDP) increased by 0.5 per cent in the June 2006 quarter and was up by 1.9 per cent for the June 2006 year. The next GDP update is on 21 December, 2006. The official cash rate set by the Reserve Bank remains at 7.25 per cent. The next review of the official cash rate will be released by the Reserve Bank on 26 October.
Trade
The trade balance for August 2006 was a deficit of $961 million, the sixth largest recorded for any month ever. Exports and imports are up 15.4 per cent and 6.4 per cent respectively on August 2005. The annual trade balance for the year ended August 2006 was a deficit of $6.5 billion (19.6 per cent of exports). Imports of merchandise goods for the year ended August 2006 were valued at $39.9 billion, up $3.5 billion (9.7 per cent) on the August 2005 year. The commodities contributing most to the increase were petroleum and products (up $1.5 billion) and aircraft and parts (up $1.4 billion). Exports of merchandise goods for the year ended August 2006 were valued at $33.4 billion, up $2.8 billion (9.2 per cent) on the August 2005 year. The main contributor to the higher exports value was milk powder, butter and cheese (up $904 million). The New Zealand dollar, as measured by the Reserve Bank's Trade Weighted Index was 9.6 per cent lower in August 2006 than in August 2005.
Food Prices
Food prices fell by 0.1 per cent in August but this still meant an increase in food prices of 3.4 per cent for the year to August 2006. Following the increase of 16.4 per cent in fruit and vegetable prices for July, they only dropped back by 1.4 per cent in August. The largest increase in August was in restaurant meals and ready-to-eat food (0.4 per cent).
House prices
In the year to August 2006 Quotable Value recorded an average 10.5 per cent rise in national property prices, a slight slowing in the rate by 1.1 per cent on the year to July figure. The average sale price for the year to August was $340,473. Rises varied greatly across the country, from 6.2 per cent and 7.6 per cent in Dunedin and Auckland respectively through to 24.9 per cent in Rotorua. According to the Real Estate Institute of New Zealand, a slight fall in median house price in August ¬– down $3000 to $310,000 – shows the market growth is “flattening out”. But the median number of days to sell a house also fell ¬– from 35 to 33 days – suggesting continued confidence in the market.
Skills Shortages
The Quarterly Survey of Business Opinion for the June 06 quarter still found 25 per cent of firms were having trouble finding skilled staff, down one percentage point on the March quarter. The number of firms having trouble finding unskilled staff fell to 4 per cent from 8 per cent over the same period. Still, 15 per cent of firms identified a shortage of labour as the main constraint on expansion, but this was down from 26 per cent in March. All 14 trades occupations monitored by the Department of Labour continued to show “genuine skill shortage”. (see note 4) At the same time the Department of Labour’s Job Vacancy Monitor recorded an 11 per cent decline in job advertisements for the year to August 2006.
Retail Sales
Retail sales were up by 0.5 per cent for July. The primary reason for this depressed figure was a fall of 2.8 per cent in motor vehicle retail sales.
Chief Executive’s Pay
The results of a recently-published Sunday Star-Times survey found the pay of a CEO in New Zealand is, on average, 19 times higher than the average paid to their workers. This represents a significant rise on the figure in 2000, which was 8 times as much. The newspaper reported a similar survey by Helen Roberts at Otago University, which found that between 1997 and 2002 CEO pay rose at 5.3 per cent per year, returns to shareholders 3 per cent, but non-CEO pay by just 1.5 per cent per year.
Migration
In the year ended August 2006, there were 80,900 permanent and long-term arrivals, up 2,000 (3 per cent) on the August 2005 year. Over the same period, departures decreased by 3,900 (5 per cent) to reach 68,400. The overall result was a net migration gain of 12,500 in the August 2006 year, which is up on the net inflow of 6,600 people in the previous August year. In the year ended August 2006, there was a net inflow of 10,600 from the United Kingdom, up 16 per cent on the August 2005 year figure (9,200). There were also increased net inflows from Fiji (2,300), India (2,100), Japan (1,800), Philippines (1,600), China (1,500), Germany (1,500) and South Africa (1,400). The net inflow from Asia increased from 6,300 in the August 2005 year to 9,600 in the August 2006 year. The highest net inflow from Asia in recent August years was recorded in 2002 (30,600). The annual net outflow to Australia was 20,400 in the August 2006 year, the same as the August 2005 year. This is still well below the net outflow of 29,100 to Australia in the August 2001 year.
For further information contact Andrew Chick on 04 385 1334 or andrewc@nzctu.org.nz
Note 1 - 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.
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. This forecast gets overtaken by more recent ones as the quarter continues but is included because it is a consensus forecast.
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 - The trades are automotive electrician, boat builder, bricklayer, cabinetmaker, carpenter, chef, diesel mechanic, electrician, fitter and turner, HVACR mechanic, line mechanic, plumber, printing machinist, and sheet metal worker.
