CTU Economic Bulletin No. 76

January 2007

Either read on, or download a printable version here (PDF file, 80k)

Comment

The economic outlook for 2007 indicates a small lift in GDP growth assisted by lower fuel prices. Annual CPI will drop to around 1.5% by mid year. But debate about monetary policy will continue. On the one hand, the housing market in particular (and some economists argue the tight labour market also) imply that interest rates should rise, whereas other economists are arguing that the easing rate of annual inflation along with a higher exchange rate and modest GDP growth justify holding the official cash rate at 7.25%. There is considerable disagreement among economists about what the Reserve Bank should do on 8th March with the BNZ saying that a rise is a “near certainty” and others saying that an increase is not warranted.  Bollard meanwhile has said that “in the absence of clear indications of a moderation in housing and domestic demand, it is likely that further tightening in policy will be required.”

Monetary policy is about the medium term. The inflationary pressures that concern the Reserve Bank are not about 2007, as we know inflation is falling. There are also financial stability concerns due to the huge increases in debt that households have taken on while house prices have doubled in the last 5 years. Debt levels doubled also in that period as a proportion of household income with over 13% of income now servicing debt). But incomes rose by under a quarter in that period. How households cope with that level of debt if and when the housing market slows is a real issue.

To a large extent the key economic issues are structural rather than cyclical. We have gone through a relatively soft landing and growth is now picking up. But the structural weaknesses such as embedded low wages, low levels of labour productivity and poor levels of savings are the major concerns. High house prices and high levels of household debt combine with repatriation of profits to overseas owned firms based in NZ to produce a huge current account deficit. None of these issues are easy to address. Some form of capital gains tax on investment property would help a bit but that would require a very broad political consensus. More could be done to encourage local ownership of firms including more active promotion of joint ventures. A multi-faceted approach is needed to lift wages. Specific attention needs to be given to low pay including in the state sector, but the key is more widespread collective bargaining, particularly at a multi-employer or industry level. With lower inflation this year there may be opportunities for an increase in real wages and also negotiated employer contributions to KiwiSaver, but in the long run another key to higher wages is improved productivity. Much is being done to address this but the time lags are considerable before we see improved productivity from higher investment in skills, infrastructure and technology. In addition, we have high labour market churn. Unemployment may be low compared with the 1990s but we still have large layoffs occurring, and some 700,000 people out of a labour market of 2 million people start a new job each year. This mobility is a good thing up to a point, but it is hard to build skills and firm specific knowledge when there is such a huge churn.

There is also now considerable speculation about the options for the Government around tax and savings. Unfortunately, it appears as if a major opportunity to boost savings is about to be lost. The outcome of the Business Tax Review is probably going to see a reduction in company tax plus some tax credits. It is true that the tax credits have some merit as they reward investment in R&D, export market development and skills. The CTU submission opposed a direct cut in company tax and gave qualified support to some tax credits. However, comments made by Peter Dunne have confirmed that a cut in company tax is very likely. But both the NZ Institute and the CTU submitted that the Business Tax Review was a significant opportunity to introduce compulsory employer contributions to KiwiSaver.

Say there was a cut in company tax of 3% and on top of that a further cut of 3% linked to compulsory employer contributions to KiwiSaver or exempt schemes. This would not only supercharge KiwiSaver; it would lift savings,  boost domestic capital with flow-on effects into the capital account and also take a bit of the load off monetary policy. Business could not complain as they would already be getting a substantial cut in company tax. And it is much easier to do than try to divide a relatively small cut in personal tax into two parts: one for consumption and one linked to compulsory employee contributions. Remember the Australian system is based on compulsory employer contributions. There is one major technical problem which is that superannuation contributions are based on payroll whereas company tax comes out of profits, so a 3% cut in company tax offset against compulsory employer superannuation contributions would have a variable impact on firms. A softer approach would simply allow firms to offset any employer contributions against a capped level of company tax (say 3%). However, this is all speculative as the Business Tax Review does not appear likely to address any of this! If the Government can get the right mix of policies around tax, savings, and wages then we will be well on the way to addressing the major structural problems the economy faces. But doing this in a way that meets the tests of political popularity, and impact on monetary policy and maintaining strong support for the public sector is a challenging task!

Finally, it is no surprise that we can expect this year to hear a lot more about sustainability. This will hopefully provide more of a framework for key government policies such as economic transformation, families young and old and NZ identity. For the CTU a sustainable development framework that ensures high visibility and a continuing action programme around social outcomes, and not just debate about the vital issue of climate change, would be welcome.

Consensus forecasts published by NZIER

The consensus forecasts were updated in December 2006¹.

Economic Snapshot

Consumer prices fell by 0.2% in the December 2006 quarter and were up by 2.6% annually. Food prices were up by 2.7% in the December 2006 year. The next CPI update is on 18 April 2007. Unemployment is at 3.8%. M?ori unemployment is 7.6% and Pacific peoples’ unemployment is at 5.1%, compared with 2.7% 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. On 1 April 2007 these rates will increase to $11.25 an hour for a person who is aged 18 or over and $9.00 an hour for those aged 16 or 17 years old or a trainee. Ordinary time wages, as measured by the Quarterly Employment Survey (QES) for September 2006², were up annually by 5% (5.4% in the private sector and 3.2% in the public sector). The QES showed that the average ordinary time hourly wage is now $22.18 ($20.77 in the private sector and $27.56 in the public sector). The female rate of $20.31 is 85.5% of the male rate which is $23.75.  The Labour Cost Index (LCI) shows that ordinary time wages went up by 3.2% in the September 2006 year (2.9% in the private sector and 3.9% 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 4.7% and the median increase was 3.8% (the average for the year was 5.5% and the median was 4.1%). The next update of wages data is on 5th February, 2007. Economic activity (GDP) increased by 0.3% in the September 2006 quarter and was up by 1.4% for the September 2006 year. The next GDP update is on 30 March 2007. The official cash rate set by the Reserve Bank remains at 7.25%.

Consumer Price Index

CPI fell by 0.2% in the December 2006 quarter. The forecasts were for a slight dip or no increase but there was mild surprise at the smaller increase in non-tradable inflation. Non-tradable prices are now rising at their slowest pace in over 3 years, having lifted 0.8% in the December quarter and 3.8% over the past year. However, a 15.2% drop in petrol prices in the December quarter was the most significant factor contributing to the fall in inflation. I have already circulated the Updated Real Wage Calculator and a list of CPI changes since 1987. Some of the forecasts are for inflation of 1.5% by September. The annual figure of 2.6% is made up from quarterly changes in the last year of +0.6%, +1.5%, + 0.7% and -0.2%. The June quarter release (probably 16th July) should also be of considerable interest as that is when the June 2005 quarterly increase of 1.5% drops out of the annual statistic.

Economic Growth

GDP increased by 0.3% in the September 2006 quarter and by 1.4% in the September 2006 year.  This compares with growth of 2.5% in the September 2005 year.  Domestic spending actually fell in the September quarter but this was mainly due to reduced investment in inventories and also reduced non-residential investment. 

Trade

Compared with the September 2006 quarter, a small rise in imports and a drop in exports resulted in a quarterly trade deficit of $1.7 billion, up from $1.3 billion in the September quarter. The seasonally adjusted drop in exports followed four consecutive quarters of growth, while the increase in imports was the ninth consecutive quarter of growth. The decrease in exports during the December 2006 quarter was led by milk powder, butter and cheese; the increase in imports was led by mobile phones and wind-powered generators. Exports for the year ended December 2006 were $34.6 billion, 12.3% higher than for the previous year. The largest increases were in the value of exports to Australia, China and Japan. Imports for the year were $40.8 billion, up 9.4% on the previous December year. The trade balance for the December 2006 year was a deficit of $6.2 billion (17.8% of exports). The New Zealand dollar rose 2.2% in the December 2006 month, but is 5.4% lower than 12 months earlier. Meanwhile the balance of payments figures out late last year showed a slight improvement in the current account deficit which went from 9.7% to 9.1% of GDP. However the $14.4 billion deficit for the September 2006 year included an $11.8 billion deficit on income from investment. This continues the trend for the current account deficit to be dominated by outward flows due to bank borrowing to finance domestic mortgages and profits being repatriated to overseas owners of NZ-based firms.

Government Accounts

The cash surplus for the five months until end of November was bang on forecast at $0.73 billion. The operating balance was $3.48 billion and the OBERAC (operating balance excluding revaluations and accounting changes) was $3.1 billion.

Property

House prices rose by 9.2% in 2006. The average sale price in the December 2006 quarter was $348,886. Quotable Value figures show that the average house price in Auckland city was $531,000, almost seven percent up on 2005. In Wellington, the average price was $449,000 - up 9.3%.  A separate measure by the REINZ records annual house price inflation as running at 11.8%. Housing is now less affordable than in early 1989 when mortgage interest rates were as high as 15.5%. Professor Bob Hargreaves, director of Massey University's Property Foundation, says home affordability declined by 5.1% over the quarter ending November 2006, reaching its lowest level since 1989. The decline was due to a rebound in the national median house price (up by 6.4%) outstripping increases in the average weekly wage (1.5%). Mortgage interest rates were also up slightly, by 0.03%. Home affordability has been in decline over the past four and a half years. On an annual basis, home affordability declined by 7.3%, with increases in house prices of 10% well ahead of a 6% increase in the average weekly wage, and increases in the weighted average interest rates on home loans of 3.4%. And the global Demographia Survey shows that on average Australians need 6.6 times annual income to buy a house, New Zealanders 6.0 times, Ireland 5.7, UK 5.5, the US 3.7 and Canada 3.2 times annual earnings to purchase a house.

Retail Sales

The value of annual retail sales in the November 2006 year increased by 4%. The BNZ estimate that actual sales volumes were up by 8% for the year.

Work Stoppages

There were 49 stoppages which ended in the September 2006 year compared with 52 for the previous year. There were 15 stoppages in manufacturing, 7 in health and community services, 4 in government administration, 3 each in retail trade, wholesale trade, electricity including gas and water supply, and also cultural and recreational services.

Migration

In the year ended November 2006, there were 82,900 permanent and long term arrivals, up 4,200 (or 5%) on the November 2005 year. Over the same period, departures decreased by 4,400 (6%) to reach 68,200. As a result, net migration increased to 14,800 in the November 2006 year, up from 6,200 in the November 2005 year. In the year ended November 2006, there was a net inflow of 11,300 from the United Kingdom, up from 9,400 in the November 2005 year. There were also net inflows from Fiji and the Philippines (both 2,200) and India (2,100). The net outflow to Australia was 20,500 in the November 2006 year, compared with 21,300 in the November 2005 year.  The net outflow of New Zealand citizens was 23,100 in the November 2006 year, of which 21,400 was to Australia.

Someone did well!

Goldman Sachs (a global investment banking, securities and investment management firm) paid Lloyd C. Blankfein, its chairman and chief executive, a bonus of $53.4 million in 2006 up from $38 million in 2005. Meanwhile nearly 3 billion people in the world that Goldman Sachs invests in live on less than two US dollars a day.

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

Notes

1 - The consensus is made up of the 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.
2 - As a measure the Quarterly Employment Survey 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.