CTU Economic Bulletin No. 55

January, 2005

Comment

What is the economic outlook for 2005? Suggestions this time last year that the economy would slow in 2004 proved to be wrong. There are a number of factors that will affect economic performance this year. The value of the NZ dollar, the level of commodity prices, export volumes and prices (and expiry of some exchange rate hedges which soften the impact of the high dollar) will be some key factors in the export sector. Interest rates, the consumption impact of tax cuts for low income families, migration, employment levels, housing and construction will also be important drivers. Retail spending remains strong, company profits are up and the Government is in a strong fiscal position. So there are plenty of factors that can offset each other which means that although the economy is expected to slow, no-one can be too sure about how much and when.

The NZIER publishes a set of consensus forecasts using the average of 11 different banks/agencies/forecasters. Economic growth which was at 4.6% for the September 2004 year is forecast to slow to 2.3% for the March 2006 year. Unemployment is forecast to rise to 4.1%. Consumer prices are predicted to be 2.5% in that year. Private sector wages are forecast to rise by 3.8% (QES measure). The current account is predicted to deteriorate to reach nearly $9 billion by March 2006.

In December the Government released the Budget Policy Statement and signalled new spending of $2.1 billion in Budget 2005. The Government has signalled that the next Budget will 'give special attention' to building the 'asset base and savings capacity of New Zealanders'. The Budget will deliver higher spending in Health and Justice and look at ways to support labour productivity growth, and continue to stress the importance of the education sector. There will be a further $2.2 billion put into the NZ Superannuation Fund which will rise to a level of $15.5 billion by June 2008.

In an intensely political year, debate on the economy will inevitably focus on the size of the fiscal surplus. The latest figures on the surplus show that a $4 billion surplus has been achieved in just 5 months. The surplus is predicted to be $6.5 billion by June 2005. Although the impact of the tax cuts for low income families is not yet showing up in the accounts, as I mentioned in the November 2004 Bulletin, employers and Opposition parties will try to divert the argument for higher wages into a debate about lower taxes. With inflation at 2.7% the Government can argue that additional tax cuts would simply end up causing higher interest rates. It will also stress the importance of running a strong surplus and the need to continually invest in health and education.

But a lot of interest will focus on what details emerge on policies which could improve the asset base for many low-income workers such as initiatives to assist first-home buyers and incentives for workplace superannuation. More funding for childcare, perhaps additional paid parental leave, and a stronger focus on productivity are other areas to watch. Boosting labour market participation is seen as good for the economy as well as household incomes.

However the year has started with considerable media interest in why wages are not rising given the tight labour market over the last few years. Westpac noted that the capital share of national income has gone up since 2000 despite a tight labour market. They argue that labour market deregulation and an open trading economy are the main reasons that wages are not rising in these circumstances. Unions have also argued that a low level of collective bargaining and the absence of industry negotiations mean that a tight labour market does not easily translate into general wage increases. We have also pointed out that high levels of profitability and increasing productivity mean that wages rises above the level of the current CPI need not be inflationary. The hard work of organising effectively around industry-level wages is one of the key challenges facing unions this year.

Economic Snapshot

This is a snapshot of key indicators for unions. Consumer prices rose by 0.9% in the December 2004 quarter and were up by 2.7% annually. Food prices increased by 1.2% in the December 2004 year. The next CPI update is on 15th April. Unemployment is at 3.8%. The minimum wage is $9.00 for those aged 18 years and over and $7.20 for 16/17 year olds and trainees. It will rise from 21 March 2005 to $9.50 and $7.60. Ordinary time wages as measured by the Quarterly Employment Survey for September 2004 were up annually by 3.4% (3.4% in the private sector and 3.5% in the public sector). The average ordinary-time-hourly wage as measured by the QES is $20.25. For the private sector it is $18.98 and for the public sector it is $25.05. For females it is $18.60, for males $21.62. The Labour Cost Index (for September 2004) showed private sector wages up 2.2% for the year, with public sector wages up by 2.4%. The key statistic for unions to note probably is that the LCI shows that for those firms where there were wage increases in the last measured quarter, the average rate of increase was 3.9% and the median increase was 3%. The next update on the QES and LCI is 8th February. Economic activity (GDP) increased by 0.6% in the September 2004 quarter and 4.6% for the September 2004 year. The official cash rate set by the Reserve Bank is 6.50%.

Consumer Price Index

The CPI rose 0.9% in the December 2004 quarter and 2.7% last year. Fuel surcharges on airfares and higher electricity prices were key drivers of the quarterly rise. The main factors over the last year were a 7.3% increase in the cost of new houses (and house construction) and a 13.5% increase in petrol. Food prices fell 0.1% in December and were up 1.2% last year. Restaurant meals, fish and poultry rises were offset by lower fruit and vegetable prices.

Fiscal Surplus

For the first 5 months of the financial year the operating balance was $3,960 million, which was higher-than-forecast by $387 million. Gross debt was $35.9 billion (25.0% of GDP), which was lower-than-forecast by $928 million. Net debt at just over $14 billion was down to 9.8% of GDP as forecast. National have argued that every worker paid $153 more tax on average over the 5 months (to end of November) compared with the corresponding period in 2003. But with more jobs, more hours being worked then the tax take goes up in any case. There is some bracket creep but the main driver of increased tax revenue is the strength of the economy. GST was up by $1 billion last year and company tax by a similar amount. They are flat rate taxes but revenue went up because there were more businesses, higher profits and more spending.

Economic Growth

The latest figures on GDP were released just before Christmas. In the September quarter GDP rose by 0.6% (following 2.1% and 0.8% for the March and June quarters). The annual rise was 4.6%. The September quarterly increase was due mainly to household consumption and business investment but this was partially offset by a dip in construction and poor net export performance. Investment in plant and machinery went up by 22% in the September year - partly due to improved profits but also due to a tighter labour market.

Interest Rates

After 6 increases in 2004 the Reserve Bank seems inclined to sit on 6.5% while the effects of a high exchange rate, slower construction and so forth feed through. But with CPI at 2.7% there is unlikely to be a reduction in the official cash rate for a while. An increase is possible if for example unemployment keeps falling and the rate of economic growth does not fall as fast or as much as anticipated.

Trade

The trade deficit continued to worsen late last year. The current account deficit hit 5.8% of GDP in the September 2004 quarter. The explanation from Statistics NZ was that "lower exports of goods combined with higher income in the form of profits and interest payments earned by foreign investors in New Zealand were the main contributors to the widening of the current account deficit this quarter". The deficit was just over $3 billion in the September 2004 quarter. Imports for the year ended December 2004 are estimated to be is $34,905 million, up 9.8% compared with the year ended December 2003. The value of merchandise exports to New Zealands current top four trading partners was 17.2% higher in November 2004 than in November 2003. The current top four trading partners are Australia, United States of America, Japan and China. These four countries account for more than half of the annual value of New Zealands exports. For the year ending November 2004, exports to the top four trading partners were 8.1% higher than for the year ending November 2003.

Work Stoppages

Thirty-six work stoppages ended in the year to September 2004 (in the same period last year there were 29 stoppages), consisting of 30 complete strikes, five partial strikes and one lockout. The 36 stoppages involved 5,774 workers and resulted in an estimated loss of $1.1 million in wages and salaries and 6,460 person-days of work. The latest annual result shows the lowest loss in wages and salaries for a September year since the series began. Of the 36 stoppages, 13 were in manufacturing, 6 in health and community services, 5 in education and 12 in all other industries combined.

On the Farm

For the first time in 18 months, commodity prices of major farm exports fell in December (by 0.7%). Beef, wool and log prices fell. But on an annual basis prices were up by 16%. Fonterra sales were up by 2% in the 6 months to November. Higher prices offset lower volumes and the effect of the high NZ dollar. Out of $5.7 billion the company has $2.4 billion available to distribute to shareholders. But lower milk production caused by bad weather last year will reduce sales. The median farm price has jumped to $1,167,500.

Business Numbers Grow

There were 324,293 New Zealand businesses in February 2004. This is an increase of 9.9% from February 2003, following a 4.8% increase in the previous year. Property and business services was the largest industry by number of businesses, representing over a third of all enterprises in New Zealand. The increase in the number of enterprises in this industry contributed over half of the overall change. New Zealand businesses engaged 1.64 million employees in February 2004. Sixty-five percent of businesses in New Zealand were non-employing. Forty-five percent of these non-employing businesses were involved in the property and business services industry. Ninety-six percent of businesses had fewer than 20 workers. However, these businesses only accounted for 29% of the total number of employees in New Zealand. Less than 1% of enterprises in New Zealand had 100 or more employees. However, these businesses accounted for 47% of the total number of employees in New Zealand.

Migration

In the year ended November 2004, there was a net (permanent and long-term) migration gain of 16,300, down 56% on the net inflow of 36,800 people in the previous November year. This resulted from 80,900 arrivals (down 12,500), and 64,500 departures (up 7,900) in the November 2004 year. In the year ended November 2004, there was a net inflow of 9,200 from the United Kingdom, down 8% on the November 2003 year figure of 10,000. There was also a net inflow from China of 3,000, down from 11,700. Overall, net inflow from Asia has reduced considerably, from 25,000 in the November 2003 year to 10,400 in the November 2004 year. There was a net outflow to Australia of 14,100 in the November 2004 year.

Housing

Consents were issued for 31,423 new dwelling units last year - up 5% on the year before. Median house prices increased 13.5% in the year to December 2004 to reach $260,000.

Retail Sales

Retail spending was up by 7.7% in the November 2004 year.

Credit Card Usage

Annual credit card expenditure in 2004 was $21.56 billion, up 11.5% from 2003 and 21.2% from 2002. At the end of December 2004, New Zealanders owed a net $4.11 billion, the first time this figure had broken above $4 billion. This was up 6.6% from Dec 2003 ($3.86 billion) and 12.5% from 2002 ($3.69 billion). There was $493.7 million interest paid over the year.

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