by Nick Clark, Group Manager National Policy
Here comes another cost
This week the Government unveiled an income insurance scheme, an expensive expansion of the welfare state which will cost businesses and employees billions.
Under the scheme, a person who loses their job will be given payments worth 80% of their former income (capped at salaries of $130,911), for up to seven months after they lose their job. The Government thinks it will smooth the transition in and out of unemployment, and help people survive periods of unemployment.
Of course, like a lot of things with noble intentions it comes at a cost – an annual cost of $3.54 billion which will be funded from a levy of 1.39 cents on every dollar earned by employees and paid by businesses to employees (i.e., 2.78 cents in the dollar in total). ACC will collect the levies and administer the scheme.
Acute cost pressures are hammering businesses and high inflation is eroding individuals’ real wages. Another tax to absorb will just add to this pressure.
Unemployment is rock bottom and is forecast to stay low. People who do lose their jobs are unlikely to be out of work for long but if they can take a seven month break between jobs that might change. There will also be hefty administrative costs, including to make sure the scheme doesn‘t become a rort.
And where is the individual responsibility? Plenty of people have income protection insurance or save for rainy days. What’s the point of either if nanny state is going to take over?
Federated Farmers would prefer to see government efforts focused on incentivising and upskilling those looking for work to fill the wide range of vacancies in the primary sector.
All up it seems strange to say the least to advance this scheme at such a time. It is yet another huge reform being advanced despite the impacts of the pandemic, to go alongside health, education, RMA, and three waters.
Consultation on the proposal is underway and submissions close on 26 April. If you’re concerned make sure to say so! We will be.
OECD gives plenty to ponder
The OECD this week published its 2022 Economic Survey for New Zealand, warning of an overheating economy and urging actions to make growth more sustainable.
On Covid, it wants to see an increase ICU capacity and vaccination rates and then a progressive relaxation of border restrictions.
On economic policy the OECD called on the Government to withdraw fiscal stimulus rapidly to reduce the burden on monetary policy and to commit to long-term debt-to-GDP targets. The corporate tax rate is considered relatively high and should be reviewed. It also wants the Government to increase the age of entitlement for NZ Superannuation and to introduce a social insurance scheme that encourages a rapid return to employment (something the Government’s proposed scheme probably won’t do).
The OECD warned that inflation is high and that monetary policy should be tightened to bring inflation back within the 1-3% target band and ensure inflation expectations remain anchored. It wants banks to be required to use debt-to-income restrictions as well as current loan-to-value restrictions.
On climate change, OECD warned that New Zealand is not on track to meet emissions reduction targets so it called for a higher carbon price but also ‘complementary abatement measures’. These it thinks would take some pressure off the need for emissions prices to go too high.
On a raft of other matters, the report also called for volumetric charging for the new proposed water entities; congestion charging in Auckland; the removal of barriers to competition in the retail grocery sector, R&D targeted grants; and greater incentives for councils to accommodate growth, such as through a share of GST. Our export intensity is considered low.
A big set of recommendations were on boosting productivity through digitalisation, including improving maths and science teaching, improving regulation of technologies, and better strategic coordination. The report noted that “digital platforms for managing irrigation, fertilisers, and tracking animals are not necessarily interoperable, nor do they produce data that can be easily combined”. So, it wants to “ensure interoperability across digital tool platforms by requiring agri-tech players to adopt common standards, while letting them choose the most suitable common standards to converge to”.
There is much in the report to think about. The Government’s response accentuated where the report was positive and where work is in progress but it would be wise to take the entirety of the report and its recommendations seriously – even those that might be a bit uncomfortable for it.
Labour market tightens
The rate of unemployment has dropped to a seasonally-adjusted 3.2%, according to Statistics NZ’s quarterly Labour Market Statistics. This is the lowest rate of unemployment since the Household Labour Force Survey began in 1986.
The number of people employed (2.831 million) was up 3,000 for the quarter and up 101,000 compared to the same quarter last year, while the number of unemployed (93,000) was down 5,000 for the quarter and down 48,000 compared to December 2020.
Both the labour force participation rate (71.1%) and the employment rate (68.8%) were broadly stable for the quarter and up for the year.
Wage inflation, as measured by the Labour Cost Index, was up 0.6% for the quarter and 2.6% for the year and the increases were bigger when expressed as ‘average ordinary time hourly earnings’, up 1.0% and 4.2% respectively. But even the latter measure is tracking well below December quarter’s inflation of 5.9%.
The labour market is clearly running hot and wage growth is likely to pick up further. It’s another sign of an overheating economy There is nothing in this data that would indicate to the Reserve Bank (as it thinks about its next OCR move in three weeks) that employment is not well above its maximum sustainable level.
Primary industries’ employment falls
December 2021 was the 13th consecutive month for employment growth, according to Statistics NZ’s monthly Employment Indicators. But filled jobs in the primary industries fell.
Compared to the previous month the number of seasonally-adjusted filled jobs was up 0.2% to 2.29 million jobs. This was mainly driven by growth for the service industries, while the primary industries’ seasonally-adjusted jobs were down 2.5% for the month.
On an annual basis, comparing December 2021 with December 2020, actual filled jobs were up 3.9%. There was particularly strong growth for professional, scientific, and technical services (up 8.5%); construction (up 8.3%); public administration and safety (up 5.9%); and health care and social assistance (up 5.7%).
However, employment in the primary industries was down 3.6% for the year. This is not for a lack of work. Economy-wide labour and skill shortages are making it increasingly hard to attract and retain workers.
Dairy prices go higher – again
The Global Dairy Trade had another bumper auction this week, with the GDT Price Index up 4.1%, hot on the heels of a 4.6% increase at the previous event.
All the commodities on offer posted increases. Whole milk powder was up 5.8%, skim milk powder up 2.1%, anhydrous milk fat up 1.4%, butter up 3.3%, butter milk powder up 9.7%, and cheddar up 2.4%.
Overall, the average selling price was $US4,630 and 28,463 tonnes were sold.
The GDT Price Index is 28.1% higher than at the same time last year.
Commodity prices hit new record
The ANZ Commodity Price Index has made a ‘flying start’ to 2022, with world prices up 1.0%.
Dairy prices gained 2.5% in January compared to December as markets digest slowing global milk supply. Meat and fibre prices were down 2.3%, with lamb and wool prices both down. Horticulture prices were up 2.6%, forestry prices down 0.3% and aluminium prices continued their recent surge, up 10.7%.
With the NZ Dollar depreciating in January, the NZ Dollar Index was up 1.9%.
On an annual basis, comparing January 2022 with January 2021 the World Price Index was up 19.7% while the NZ Dollar index was up 26.5%. Both are at new record highs.
Less good was news that global shipping costs have risen again. Also, while farmgate prices are strong, farm production is and will be hampered by dry conditions and a severe labour shortage. On-farm costs are rising quickly while government policy and regulation is also undermining confidence.
Fonterra payout lift
With dairy commodity prices so strong, last week Fonterra lifted its 2021/22 Forecast Farmgate Milk Price, increasing the mid-point of its range by 50 cents from $8.70 to $9.20 per kg milk solids (the range now being $8.90 to $9.50).
The higher forecast milk price reflects continued strong global demand for dairy products combined with slower growth in global milk supply. This includes in New Zealand where Fonterra forecast a small drop in its 2021/22 milk collections from 1,525 million kgMS to 1,500 kgMS.
Fonterra said a milk price at the new mid-point would contribute $13.8 billion to the New Zealand economy this season. This is up $530 million on the previous forecast even taking account of lower milk collections. It provides some welcome good economic news although higher on-farm costs will eat into it.
A higher milk price puts pressure on its margins but Fonterra said it remains comfortable with its current 2021/22 earnings guidance of 25-35 cents per share.
Dairy pushes exports to record monthly high
Strong dairy exports made December a record high month for goods exports, but there was still another goods trade deficit, according to Statistics NZ’s monthly Overseas Merchandise Trade statistics.
In December 2021 goods exports were worth $6.07 billion up 12.7% compared to December 2020 and a new monthly record, with movements for the following six largest annual export commodities:
- Milk powder, butter, and cheese exports up 28.5% to $2.07 billion.
- Meat and edible offal up 19.0% to $879 million.
- Logs, wood, and wood articles down 11.6% to $368 million.
- Fruit down 63.4% to $25 million.
- Preparations of milk, cereals, flour, and starch up 2.8% to $221 million.
- Wine down 6.5% to $165 million.
In addition, exports of eggs, honey, and other edible animal products were down 11.4% to $47 million; live animals down 38.4% to $32 million; and wool down 6.7% to $46 million.
Goods imports were even stronger, up 23.3% for the month to $6.55 billion. All the major import commodities were up, led by a 23.7% increase for vehicles, parts, and accessories and a 17.6% increase for mechanical machinery and equipment. Also of note was a 154% increase in fertiliser imports, to $131 million.
The net effect was a goods trade deficit of $477 million in December 2021, a turnaround from December surpluses in 2019 and 2020.
On an annual basis, comparing the year to December 2021 with the year to December 2020, goods exports were up 5.6% to $63.3 billion, with:
- Milk powder, butter, and cheese exports up 7.3% to $16.98 billion.
- Meat and edible offal up 7.3% to $8.71 billion.
- Logs, wood, and wood articles up 22.4% to $5.52 billion.
- Fruit down 0.7% to $3.91 billion.
- Preparations of milk, cereals, flour, and starch down 19.0% to $2.02 billion.
- Wine down 3.4% to $1.95 billion.
Exports of eggs, honey, and other edible animal products were down 7.8% to $499 million; live animals down 0.3% to $468 million; but wool was up 13.8% to $423 million.
Goods imports for the year to December 2021 were worth $70.07 billion, up 23.0% on the previous year. All the major import commodities had double digit percentage increases, with a massive 58.3% increase in imports of vehicles, parts, and machinery to $10.18 billion. Fertiliser imports exceeded $1 billion, up 43.9% for the year.
The annual goods trade balance was a deficit of $6.78 billion, a huge turnaround from the $2.98 billion surplus for the previous year.
Consumers remain in the doldrums
Consumer confidence slipped slightly in January, according to the monthly ANZ-Roy Morgan Consumer Confidence Index.
The overall consumer confidence rating came in at 97.7, down 0.6 points from December. A score below 100 indicates more pessimists than optimists and it is also well down on the long-term average of 120.
Turning to the detail, perceptions of current personal financial situations fell 5 points to -4%, while a net 14% expected to be better off this time next year, up 2 points. Respondents thought it a bad time to buy a major household item, with this indicator down 4 points to -4. Perceptions for the next year’s economic outlook fell 1 point to -21%, a very low level, although the five-year outlook lifted 4 points to +3%.
House price inflation expectations were unchanged at 5.3%, while CPI inflation expectations ticked up 0.2 points from 5.6% to 5.8%.
NIWA Soil Moisture Data
NIWA’s latest soil moisture maps (as at 9am Thursday 3 February) show soil conditions over almost all of the North Island are drier than usual for this time of year, and especially so on the west coast of the island. In the South Island, Southland is drier than usual but Golden Bay and Kaikoura are significantly wetter than usual.
Exchange Rates
The NZ Dollar lost ground again this week, down 0.3% against the Trade Weighted Index. It dropped against the currencies of all our major trading partners, except the Chinese Renminbi.
Source: Reserve Bank of NZ
Wholesale Interest Rates
Over the course of the week, the yield for the 90 Day Bank Bill was up 4 points to 1.14% but the 10 year Government Bond yield was down 11 points to 2.55%.
The Reserve Bank will next review monetary policy settings (including the OCR) on 23 February 2022. Another increase is almost certain.
| This Week (3/2/22) | Last Week (27/1/22) | Last Month (5/1/22) | Last Year (3/2/21) | |
| OCR | 0.75% | 0.75% | 0.75% | 0.25% |
| 90 Day Bank Bill | 1.14% | 1.10% | 0.98% | 0.28% |
| 10 Year Government Bond | 2.55% | 2.66% | 2.45% | 1.27% |
Source: Reserve Bank of NZ