CTU Economic Bulletin No. 79
April 2007
Either read on, or download a printable version here (MS Word, 225k)
Comment
Despite welcome developments in April such as a higher minimum wage, four weeks annual leave, a lift in family support payments, and another fall in the number of people on unemployment benefit, it's not a pretty picture with the high dollar hurting exports, valuable manufacturing jobs being lost, interest rates rising despite inflation running at 2.5% and falling, and in the last three calendar years house prices increased by 38.5% while wages rose by just 8.7%. The Budget will, we presume, cut company tax to 30%, introduce an R&D Tax credit (and maybe other tax credits), and there is now speculation about a tax cut linked to workplace savings. And KiwiSaver will help over a period shift investment preferences to some extent towards retirement savings and away from investment housing. But what an increasing number of people are calling for is a hard look at monetary policy as well as other options to cool the housing market.
It is time for the business community to persuade the National Party leadership to take a more constructive approach to options on the housing market and the broader conduct of monetary policy. At the moment all we see is constant criticism of so-called 'low quality' government spending (with tax relief for low income families and student loans being the examples given so far). Also National is clearly trying to create a sense of crisis in the economy in the lead up to the Budget. But we are dealing with long run structural imbalances in the economy around housing, savings and incomes. Any shift towards, for example, taxing speculative property (capital gains tax and/or removing tax deductibility of expenses on investment housing) and restraining banks will not be easy - and will need widespread support. The CTU does not claim to have all the answers - but we want to see serious consideration of options that can lead to a lower track for interest rates and exchange rates.
Last month, this Bulletin focused in particular on the importance of the manufacturing sector. Recent developments confirm that the Government response to the Manufacturing Report released last year needs urgent attention. It is not good enough to say we must focus on high end manufacturing. Who could disagree with that? But there needs to be support for manufacturers and workers to manage this economic transformation. And do we really think we can hang on to all the design, intellectual property, research and development and engineering that underpins manufacturing if the production jobs keep going offshore? Economy-wide initiatives on infrastructure, broadband and incentives for R&D will help manufacturing. And specific industry strategies within the broad manufacturing sector are also vital. But in addition there is a need for a strategy that can galvanise the entire manufacturing sector.
Meanwhile in the comment this month I also consider whether we are focusing too much on the wrong statistics. As someone said once, 82.7% of statistics are made up on the spot. But seriously - do the statistics we regularly use actually measure what matters? As Albert Einstein said "not everything that counts can be counted and not everything that can be counted, counts". For instance Marilyn Waring in her seminal book Counting for Nothing argues that monetary value needs to be attributed to unpaid work - productive and reproductive. Recently there has been more and more debate about how to measure sustainability and wellbeing. The Canadians are establishing an Index of Wellbeing which will measure: living standards, time allocation, healthy populations, ecosystem health, educated populace, community vitality and civic engagement. The first release is in October 2007.
Professor Richard Layard from the London School of Economics describes GDP as a hopeless measure of welfare and says it makes more sense to measure happiness. He argues that happiness is like noise - there are many different types but you can measure the decibels. There is also a Human Development Index which measures the average achievements across life expectancy at birth, adult literacy, and a decent standard of living as measured by GDP per capita in purchasing power parity. The GPI or Genuine Progress Indicator uses 26 social, economic, and environmental variables. The GPI assigns explicit value to environmental quality, population health, livelihood security, equity, free time, and educational attainment. It values unpaid voluntary and household work as well as paid work. It counts sickness, crime and pollution as costs not gains.
Some progress has been made in New Zealand with the MSD Social Report which also focuses on wellbeing. It has 10 areas which are measures and 42 indicators. The areas include: health, knowledge and skills, paid work, economic standard of living, civil and political rights, cultural identity, leisure and recreation, physical environment, safety, and social connectedness. And the Local Government Act requires a collaborative process every 6 years to identify community outcomes and for a report from 2009 every three years on whether or not the outcomes have been achieved.
Of course there is no shortage of problems with these alternative measures. Sustainability implies an intergenerational measure. And measuring well-being will have to satisfy critics on the subjective preferences implied in such a measure. How would an Index of Wellbeing aggregate the indicators and get a one dimension scale for a multi-dimensional measure? How would weightings be determined?
But there is no doubt that the things we count and measure reflect our values as a society. We know that GDP can go up because of higher exports or more prisons. Our GDP can grow while our natural capital declines. Every day we have constant media commentary on business profits and performance, and the key economic measures discussed are interest rates, GDP, trade figures and so forth. I am not suggesting these are unimportant. But there is clearly a long way to go before we have the same profile for measures around sustainability and wellbeing.
Consensus forecasts1 published by NZIER
The consensus forecasts were updated in March 2007.
March Year %
2007
2008
2009
GDP
1.8
2.4
2.9
CPI
2.6
2.5
2.6
Wages (QES)
5.3
3.9
3.4
Employment
0.9
0.9
1.3
Unemployment
4.0
4.3
4.4
Economic Snapshot
Consumer prices rose 0.5% in the March 2007 quarter, and were up by 2.5% annually. Food prices increased 3.3% in the March 2007 year. Unemployment is at 3.7%. Maori unemployment is 7.2% and Pacific peoples' unemployment is at 6.8%, compared with 2.6% for European/Pakeha. The minimum wage is $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. The Labour Cost Index (LCI) shows that ordinary time wages went up by 3.2% in the December 2006 year (3.2% in the private sector and 3.5% in the public sector). Where there were wage increases in the last measured quarter, the average rate of increase was 5.2% and the median increase was 4.2% (the average for the year was 5.5% and the median was 4.2%). The next update of wages data is on 7th May, 2007. Economic growth increased by 0.8% in the December 2006 quarter and 1.5% in the December 2006 year compared with a 2.2% increase in 2005. The Official Cash Rate (OCR) set by the Reserve Bank is 7.75%.
Consumer Price Index
The Consumers Price Index rose by 0.5% in the March 2007 quarter; which was lower than expected, and by 2.5 % in the March 2007 year. The main factors in the annual increase were housing and household utilities (up 5.3%), food (up 4.0%), alcoholic beverages and tobacco (up 3.6%), and miscellaneous goods and services (up 3.3%). Food prices rose by 3.3% in the March 2007 year. Although there are some inflation pressures in the medium term, when the next quarterly release occurs on 16th July we are very likely to see another fall in the annual CPI. This is because the four-quarter composition of annual inflation is 1.5 + 0.7 - 0.2 + 0.5= 2.5%. When the next quarter comes out, the 1.5% for the June 2006 quarter drops out of the annual rate. If for instance it was replaced by the same figure as the most recent quarter (0.5%) then annual CPI would be only 1.5%. Even if it was 1.0% for the quarter, annual CPI would fall to 2.0%.
Interest Rates
With 30% of fixed mortgages due for renewal in the next 12 months, the official cash rate went up on 26th April to 7.75%, pushing floating mortgages over 10% and. This was a week after the New Zealand dollar hit US74.76c bringing it to its highest point in 25 years. From some of the media and bank economist comment you would think we had runaway inflation instead of 2.5% (and set to go lower). Of course monetary policy is about the medium term, but there is significant division among economists on the conduct of monetary policy. On the day of the latest increase, Bancorp said: "We continue to maintain that the best way the Reserve Bank could intervene to bring down the currency is to cut the OCR (to around the same level as Australia's rate), thereby halt the inflow of capital into New Zealand and in turn remove the cheap and easy credit availability that is funding the increase in debt and subsequent rises in non tradeable inflation. One move to fix it all." And Ganesh Nana from BERL has argued that monetary policy should look at general levels of inflation and not focus on one price - houses.
Contrast what is happening here with Australia. Inflation here is 2.5%. In Australia it is 2.4%. Our official cash rate is 7.75%. In Australia, the cash rate target is 6.25%. Their Reserve Bank perhaps focuses more on an analysis of core inflation rather than predictions around inflation expectations and output gap measures. And the Australian Reserve Bank Act contains references to non-inflation objectives. But whatever the explanation, they have now have a significantly lower cash rate.
The RBNZ last week also suggested that a couple of the conditions that would justify intervention to drive down the dollar had been met. But as John Edwards of HSBC has noted, the intervention task is to drive up the US dollar in global markets and that is beyond New Zealand. Of course, the US dollar is not the only currency that matters. Against the Euro, pound and Australian dollar the Kiwi is not at a twenty year high but around the middle of the range across that period. But there is no doubt that at 7.75%, the highest interest rates in the developed world, there will be speculation on the NZ dollar. Unless the US economy surges, or the NZ economy collapses (neither a likely prospect) , a remaining way to drive down the US dollar exchange rate is to get our interest rates down.
Housing and Property
House prices rose by 9.8% in the March 2007 quarter compared with the same quarter of 2006. Also housing consents are falling. In March 2007, consents were issued for 2,269 new housing units, 30 fewer than in March 2006. In the last three years house prices have increased by 38.5% while at the same time wages have gone up by 8.7%, meaning that house prices are outstripping wages by 4 to 1. On April 23, two housing reports were released, showing that the number of working households in Auckland who can no longer afford to buy at the lower quartile house price has grown 169% in the past decade to an estimated 54,900 households. An increase in the proportion of home owners experiencing housing stress (paying more than 30% of their gross income in housing costs) has particularly impacted on young home owners and households earning between $50,000 and $70,000. There is also growing evidence of renting as households cannot afford to buy in suburbs of their choice. In the rural sector, the national median sales price for farms was also up, from $1,195,000 in February to $1,212,500 in March, up 10.2% on the March 2006 median of $1,100,000.
Unemployment
The numbers of people on the unemployment benefit have dropped 35% in a year. Maori unemployment is down 37% since March 2006, to 9,902. The Maori youth rate has dropped by 68%, with 605 of 18-19 year-olds now on the dole, compared with 1890 at the same time last year. Dole numbers are now 132,000 lower than in 1999 and 68% of New Zealanders are currently participating in the labour market. There were 7,219 advertised job vacancies measured in March 2007: 5% fewer than in the same period 12 months earlier. Despite the on-going fall in vacancies, there were still 19% more advertised vacancies in March 2007 than in March 2003. Department of Labour statistics show a 15,000 decrease in the number of women in employment during the second half of last year. This has in part been attributed to the introduction of the Working for Families package, enabling some family's deciding they can make do on one salary.
Work Stoppages
There were 42 stoppages (31 complete strikes, 10 partial strikes and one lockout) which ended in the December 2006 year compared with 60 stoppages for the previous 2005 year. There were 13 stoppages in manufacturing, however, the health and community services industry had the highest number of employees involved, contributing 35% towards the total.
Trade
For the March 2007 year the trade balance was a deficit of $5,776 million (16.4% of exports). This is an improvement on the year ended March 2006, where the deficit was the highest on record for a March year, at $7,062 million (22.7% of exports). This year we have seen dairy export volumes increase as well as a lift in forestry exports. But we have seen a weakening of meat exports as well as mechanical and electrical machinery. But import volumes are increasing.
Government Accounts
Financial statements for the eight months till the end of February were released by Treasury on 11 April. These figures show an operating surplus of $6.5 billion, which is $1.4 billion higher than the operating balance forecast. The Treasury attributes $1 billion of the extra money on the books to mainly unrealised gains from the New Zealand Superannuation, Government Superannuation and ACC funds, and foreign exchange gains. The OBERAC (Operating Balance Excluding Revaluations and Accounting Changes) stood at $5.59 billion; half a billion higher than forecast and this was attributed to delays in departmental spending.
Retail Sales
Total retail sales increased 1.9% ($98 million) in February 2007, compared with January 2007. This is the largest percentage increase since March 2004. The main increases came from: supermarket and grocery stores, up 2.4% ($25 million); other retailing, up 6.0% ($14 million); appliance retailing, up 5.7% ($12 million); cafes and restaurants, up 4.0% ($12 million); and automotive fuel retailing, up 2.0% ($9 million).
Migration
In the year ended March 2007, there were 82,500 permanent and long term arrivals, up 2,400 (3%) on the March 2006 year. Over the same period, departures remained unchanged at 70,400. As a result, net migration was 12,100 in the March 2007 year, up from 9,700 in the March 2006 year. There was a net outflow of 26,200 New Zealand citizens in the year ended March 2007. Non-New Zealand citizens recorded a net inflow of 38,300 in the same period, the highest net inflow in a March year since 2004. In the last 10 March years, the highest net outflow of New Zealand citizens was 42,300 in 2001, and the highest net inflow of non-New Zealand citizens was 56,200 in 2003. In the year ended March 2007, there was a net inflow of 10,200 from the United Kingdom, just below the net inflow of 10,300 recorded in the March 2006 year. The Philippines was the second largest source of net migration to New Zealand in the March 2007 year, increasing from a net inflow of 500 in 2005 to 1,000 in 2006 and 2,700 in 2007. There were also net inflows from India (2,500) and Fiji (2,300) in the March 2007 year. The net outflow to Australia was 23,300 in the March 2007 year, compared with 20,700 in the March 2006 year.
NZ Population More Ethnically Diverse
Statistics New Zealand has released a summary of New Zealand's cultural statistics, showing the country's Asian population increased by almost 50% in the five years to 2006. Those who identify as Asian now make up more than 9% of New Zealand's population and almost 20% of Auckland's. The number of Pacific Islanders rose by just under 15% in the same period. The results also show a change in New Zealanders religious affiliations, with the number of Sikhs, Muslims and Hindus all increasing by more than 50%.
Student Debt
The average leaving debt accumulated by students who borrowed under the Student Loan Scheme increased from $11,220 for those who left study in 1997 to reach $14,780 for those who left study in 2004 (an increase of 32%). Also Statistics New Zealand revealed on April 3 that the income males' received was consistently higher than females' income, five years after leaving study, across every field of study. The average income one year after leaving study for males who left study in 2000 was 6% higher than the average income for females who left in the same year. Males' average income five years after leaving study was 20% higher than females' for the same cohort of students who left study in 2000.
Non-profit institutions
There were 97,000 non-profit institutions operating in New Zealand in 2005, according to a release by Statistics New Zealand on April 16. Non-profit institutions are defined as being organised, not set up to make a profit, not distributing profits, separate from government, self-governing and having voluntary membership. The largest number were in culture, sport and recreation (45%), followed by social services (12%) and religion (10%).The majority (90%) of non-profit institutions did not employ paid staff. Volunteers outnumbered paid employees by approximately four to one. Non-profit institutions employed 105,340 paid employees, and enlisted the help of over 436,500 volunteers. The greatest number of paid employees were involved in social services (30%), followed by education (19%) and culture, sport and recreation (16%). Health services employed the greatest number of paid staff per non-profit institution. This release by Statistics New Zealand is a forerunner for the 'Non-Profit Institutions Satellite Account' being released in August 2007. The satellite account will measure the contribution of non-profit institutions to GDP, the value of volunteer labour for these institutions and will also describe their sources of income.
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. Because the consensus forecasts are done only every 3 months, some of the more recent forecasts will be more accurate.
