CTU Economic Bulletin No. 74

CTU Monthly Economic Bulletin
No. 74 (October 2006)

Either read on, or download a printable version here (PDF file, 87 kb).

Comment
There is increasing concern about the operation of private equity funds. In the last week numerous Australian companies have come under huge pressure from private equity funds and hedge funds which seek to buy up listed companies, leverage up debt, restructure the company and then sell the firm within 5 years after extracting huge profits. Some have described these funds as ‘impatient capital”.

Hedge funds now manage a vast pool of capital - $1.5 trillion. As the IUF (see note 1) has commented, companies have always sought to maximise profit. What is new is the drive for profit through the elimination of productive capacity and employment. Even the large pension funds are being diverted to some extent into private equity vehicles. And in November, 2004 the Economist said that ‘the private equity industry had moved from the fringe to the centre of capitalist action’. I am not so sure that private equity funds operate any differently from the sort of hot money vehicles we have seen in the past and caused problems such as the ‘Asian’ financial crisis in 1997/98, but there is no doubt that the scale of their operation has increased.

In the first two months of 2006 it is estimated that hedge funds and private equity funds made over 4,000 deals involving US$473 billion in assets. In many cases announcements of very significant increases in profits coincide with notice of thousands of job cuts. Private equity vehicles like Texas Pacific or the Blackstone Group (which owns companies employing over 350,000 workers) are driving a reckless financial model which requires high levels of debt, company restructuring and quick exit. And, over 80% of Hedge Funds are registered in the Cayman Islands. They are volatile. Over the 12 month period to August 2006 just under 2,000 funds were established. During the same period 575 were liquidated. And because no one knows exactly how much these funds control, an adverse movement on markets could set off a chain reaction, possibly threatening major banks with insolvency. As one commentator noted about the hedge fund managers who gathered for Hedgestock held in the UK in June this year, “they have the opportunity to make more money than their counterparts in banks because they tend to get a percentage of their own profits rather than a share of the desk's returns”. No wonder one of the panel sessions was called “How should hedge-fund-related businesses be valued - Egonomics?”

The impact of these funds is also exacerbating income disparity. As the IUF has pointed out in an excellent paper on ‘financialisation’ it is clear that wages are no longer keeping pace with the growth in profits and productivity. One of the reasons for this is this increasing drive for high short-run returns. In New Zealand we know that in the period 1988 to 2005, labour productivity increased by 56% but real wages barely moved. We have also seen that large profits and a tight labour market failed to produce significant lifts in wages. We have set out elsewhere our concern about the adequacy of employment law to ensure better distribution to workers. But these same trends can be seen in many other countries.

Richard Freeman from Harvard has suggested that one general factor could be the rapid integration of China and India into the global labour force. But we are also seeing unprecedented salaries and bonuses being paid to a very small group. A quarter of global economic activity is controlled by 200 companies and we now have the situation where CEOs in the USA earn 530 times the average wage compared with 40 times in 1980. We have seen similar excesses here with regular boosts for those already on very high incomes.

In New Zealand, we are also acutely aware of the extent of exposure we have to overseas investment. As Statistics NZ noted last month “The year ended June 2006 current account deficit was $15.2 billion, $3.1 billion wider than for the year ended June 2005. This widening is mostly due to a $1.9 billion rise in the investment income deficit, resulting from a fall in income earned from New Zealand investment abroad, combined with an increase in income earned by foreign investors from their New Zealand investment”. And Treasury said that “the investment income deficit increased as a result of increased profits from foreign-owned New Zealand companies (especially in the banking and energy sectors) and higher interest payments”.

So we are exposed to overseas owned firms – which are increasingly exposed to pressures from private equity funds. It is clearly time for much greater regulation of capital flows and investment – but expect howls of protest from the usual quarters should any move be made.

Consensus forecasts (see note 2) published by NZIER
The consensus forecasts were updated in September 2006.

Economic Snapshot
Consumer prices rose by 0.7% in the September 2006 quarter and were up by 3.5% annually. Food prices were up by 3.9% in the September 2006 year. The next CPI update is on 17 January 2007. Unemployment is at 3.6%. M?ori unemployment is 8.2% and Pacific peoples’ unemployment is at 5.9%, compared with 2.4% 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) (see note 3) for June 2006 , were up annually by 4.4% (4.9% in the private sector and 2.0% in the public sector). The QES showed that the average ordinary time hourly 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% of the male rate of $23.30. The Labour Cost Index (LCI) shows that ordinary time wages went up by 3.3% (3.0% in the private sector, 4.2% 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% and the median increase was 4.0% (the average for the year was 5.4% and the median was 4.2%). The next update of wages data is on 6 November. Economic activity (GDP) increased by 0.5% in the June 2006 quarter and was up by 1.9% 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%.

CPI
The Consumers Price Index rose by 0.7% in the September 2006 quarter and by 3.5% in the September 2006 year. The main factors in the annual increase were housing and household utilities (up 5.4%), transport (also up by 5.4%) and food (up 3.9%). Food prices are updated monthly and rose by 3.9% in the September 2006 year. Fruit and vegetable prices were up by 19.5% in the year. The latest overall CPI release is the first in a new CPI series with a change in some of the sample of goods and services and some new weightings of expenditure items. I have already distributed a revised list of CPI quarterly and annual changes since 1987 and the updated CTU Real Wage Calculator. The four quarterly increases which comprise the 3.5% annual increase are 0.7, 0.6, 1.5 and 0.7. Because of the 1.5% increase in the June 2006 quarter, we will only see inflation go below 3% within the next 9 months if there are some very low quarterly increases. However, some are forecasting CPI at 2.8% by the end of this year. This is mainly because the full effect of the reduction in petrol prices has yet to impact on the CPI and we could therefore see a figure close to zero for the December quarter CPI to be announced next January. The Consensus Forecast is for CPI of 2.5% by March 2007.

Incomes are Up
Average weekly income from all sources was $610, up 4.0% from the June 2005 quarter. Average weekly income from all sources was up 2.1% for males (to $754) and up 7.1% (to $473) for females (this shows the effect among other things of both lower hours of work for women and lower pay rates), from the June 2005 quarter. Average weekly wage and salary income for people receiving income from wages and salaries was $739 in the June 2006 quarter, an increase of $21 (2.9%) on the June 2005 quarter. There was also a 4.9% increase in the number of people receiving wages and salaries income. The average hourly rate in the June 2006 quarter was $20.04 and the median was $17.00.  The average weekly household income from all sources was $1,321 in the June 2006 quarter, an increase of 4.8% from the June 2005 quarter average of $1,260 whereas median weekly household income from all sources rose 8.6% (to $1,129). Note that the New Zealand Income Survey (NZIS) is run annually as a supplement to the Household Labour Force Survey (HLFS) during the June quarter so is a different source from both the Labour Cost Index and the Quarterly Employment Survey.

Multiple Jobs
Information from the Linked Employer-Employee Data shows that in the 2005 tax year, a quarterly average of 5.0% (79,976) of workers had two or more jobs. In the March 2005 quarter, the highest percentage of workers holding multiple jobs (16.0%) worked in the health and community services sector.

Work Stoppages
There were 59 work stoppages in the June 2006 year consisting of 54 complete strikes, three partial strikes and two lockouts. Of these stoppages, 18 were in manufacturing, 10 were in health and community services, and 5 were in education.

Maximum Payout to Workers in Insolvency Increases
From 30th September 2006, the maximum payment as a priority debt to workers (for unpaid wages, holiday pay and redundancy compensation) when their employer is insolvent, has increased from $15,000 to $16,420.

Australian Minimum Wage Rises
The new Australian Fair Pay Commission has announced a $27.36 a week increase which brings the federal minimum wage to $511.86 a week. At AUD$12.80 an hour, this translates to around NZ$14.86 which is 45% higher than the NZ minimum wage of $10.25.

Housing and Property
Residential property values increased by 10.4% over the past year (calculated over the three months ending September 2006 in comparison to the same period last year). The average New Zealand sale price was $344,748 for this period. Meanwhile, building consents issued in September 2006 confirmed an upward trend in the number of new housing units. Consents for 2,545 new housing units were issued in September 2006, 262 more than in September 2005.

Retail Sales
Seasonally adjusted total retail sales remained unchanged in August 2006 compared with July 2006. Excluding the vehicle-related industries, sales for the core retailing group fell 0.6% in August 2006. The total retail sales trend has eased in the past year, with the rate of increase reducing to a monthly average of 0.3%. This compares with an average increase of 0.6% in the previous two years.

Trade
The trade balance for September 2006 was a deficit of $587 million (20.8% of exports). This is the smallest deficit for a September month since 2002. However, the trade balance for the September 2006 year is a deficit of $6.2 billion (18.2% of exports). This compares with a deficit of $5.8 billion for the previous September year. The value of merchandise exports for the year ended September 2006 was $33.9 billion, 10.0% higher than for the previous year. The largest increases were for milk powder, butter and cheese (up $1.0 billion), aluminium and aluminium articles (up $332 million), and aircraft and parts (up $231million). Merchandise imports for the year ended September 2006 were $40.0 billion, up 9.5% on the previous September year. For the September 2006 year, petroleum and products (up $1.5 billion), and aircraft and parts (up $1.3 billion) recorded the largest increases. The Trade Weighted Index (TWI) shows that the New Zealand dollar rose 4.0% the September 2006, but is 6.6% lower than 12 months earlier.

Student Debt
The level of student debt reached $8.37 billion in the 2005/06 year, up from $7.5 billion the previous year. The Student Loan Scheme Annual Report estimates that by 2014/15 the level of debt will be $12.7 billion.

More NZ Businesses
The number of non-farming businesses increased 4% in the February 2006 year to reach 346,000. Property and business services continues to be the industry with the largest number of businesses, representing 36% of all enterprises in New Zealand. 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. More than three-quarters of New Zealand businesses were located in the North Island, with 35% in the Auckland region.

Migration
In the year ended September 2006, there were 81,600 permanent and long term arrivals, up 2,700 (3%) on the September 2005 year. Departures decreased by 4,100 (6%), to 68,400. The overall result was a net migration gain of 13,200 in the September 2006 year, up on the net inflow of 6,400 people in the September 2005 year. In the year ended September 2006, there was a net inflow of 11,000 from the United Kingdom, up from 9,300 in the September 2005 year. There were also net inflows from Fiji (2,300), India (2,200), Philippines (1,800), Japan (1,700), China (1,500), Germany (1,500) and South Africa (1,400). The net inflow from Asia increased from 6,100 in the September 2005 year to 10,100 in the September 2006 year. The highest net inflow from Asia in recent September years was 30,800 in 2002. The annual net outflow to Australia was 20,600 in the September 2006 year, similar to the 20,700 in the September 2005 year.

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

Footnotes:
Note 1 -  International Union of Food, Agricultural, Hotel, Restaurant, Catering, Tobacco and Allied Workers' Associations.
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.