Economic outlook, government finances and

the labour market

In the thick of it seminar26 June 2015

Bill RosenbergPolicy Director/EconomistN Z Council of Trade Unions

Outline

The economy Government financesWages and salaries

2

The New Zealand economyGDP growth has probably peaked

– International outlook has many risks: Eurozone and Greece China and Australia growth rates have fallen (but not so bad) US still not fully recovered

– Commodity prices especially dairy have fallen– Along with fall in interest rates, dollar down (mainly vs US$)– Christchurch reconstruction has probably peaked – will flat line– Construction in Auckland still strong, but mixed in regions– Very low 0.2% growth in March 2015 quarter– Treasury forecast is for annual growth to peak this year, but

was surprised by lower March growth– Growth lower than before the Global Financial Crisis hit – per

capita growth even more so 3

4Source: Statistics New Zealand National Accounts; Treasury Budget 2015 forecasts

Treasury Forecast

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Economic growth:Increase in Gross Domestic Product

Quarterly increase

5Source: Statistics New Zealand National Accounts; Treasury Budget 2015 forecasts

Treasury Forecast

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Economic growth:Increase in Gross Domestic Product

Annual increase

Quarterly increase

6Source: Statistics New Zealand National Accounts; Treasury Budget 2015 forecasts

Treasury Forecast

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Economic growth:Increase in Gross Domestic Product

Annual increase

Quarterly increase

Average 2000-2007,2012-2019

7Source: Statistics New Zealand National Accounts; Treasury Budget 2015 forecasts

Treasury Forecast

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Economic growth:Increase in Gross Domestic Product

Annual increase

Annual increase percapita

Quarterly increase

Average 2000-2007,2012-2019

8Source: Statistics New Zealand National Accounts; Treasury Budget 2015 forecasts

Treasury Forecast

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Economic growth:Increase in Gross Domestic Product

Annual increase

Annual increase percapita

Average 2000-2007,2012-2019

The New Zealand economy Inflation low, but likely to rise with falling dollar and interest rates

House prices rising rapidly in Auckland

Household debt rising again; continuing concerns regarding farming debt, especially with dairy and log prices falling

Unemployment still high at 5.8% (146,000 people) given number of years past the recession

– Higher in most of the North Island, lower in the South Island

– Strong employment growth, but also strong increase in labour supply

Net immigration 57,800 in year to May; Beneficiaries being forced into work

So low productivity growth (Treasury est. negative 0.3% in year to June 2014, only 0.7% this year)

Low pay rises

9

10Source: Statistics New Zealand; Treasury Budget 2015 and RBNZ MPS March 2015 forecasts

1.6%

0.3%1.3%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%M

ar-0

8

Mar

-09

Mar

-10

Mar

-11

Mar

-12

Mar

-13

Mar

-14

Mar

-15

Mar

-16

Mar

-17

Mar

-18

Mar

-19

CPI Trend and forecasts

CPI % Forecast (Treasury) Forecast (RBNZ)

11

3.8%

6.9%

6.2%

6.6%

6.3%

7.2%

6.4%

5.5%

5.8%

2%

3%

4%

5%

6%

7%

8%

Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19

Perc

enta

ge u

nem

ploy

ed

Actual and Forecast unemployment

Actual unemployment rate (LHS) Treasury Forecast Unemployment Rate (LHS)

NZIER consensus forecast

12

60,000

80,000

100,000

120,000

140,000

160,000

180,000

2%

3%

4%

5%

6%

7%

8%

Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19

Perc

enta

ge u

nem

ploy

ed

Actual and Forecast unemployment

Actual unemployment rate (LHS) Treasury Forecast Unemployment Rate (LHS)NZIER consensus forecast Actual people unemployed (RHS)Treasury Forecast People Unemployed (RHS)

Government finances May or may not be a surplus this financial year (to June

2015)– But any deficit (or cash deficit) is now so small that it is well

below the increase in nominal GDP– So borrowing needs would rise more slowly than GDP from the

new financial year even without going into surplus – net debt would fall as proportion of GDP

Could afford more government debt(not that I’m advocating it!)– Government debt low by international standards

13

14

Low government debt, plenty of room to move. Better to not to try to reduce it: IMF research

Source: “When Should Public Debt Be Reduced?”, Ostry et al, IMF 2015

Government finances Negative effect on economy of fiscal policy on GDP

2017-19

15

Conclusion: current fiscal

position too tight cutting

expenditure for other reasons

26%

27%

28%

29%

30%

31%

32%

33%

34%

35%

Government expenses as percent of GDP

Forecast

Wages and Salaries

Generally low wage increases since GFC State sector worse

16

17

900

950

1000

1050

1100

1150

2009 2010 2011 2012 2013 2014

Wages and Productivity, market/measured sector

Producer real Compensation of Employees/hour Consumer real Compensation of Employees/hourProducer real average wage Consumer real average wageLabour Productivity

18

35%

40%

45%

50%

55%

60%

65%

The nation's income: how it is sharedSource: GDP (Income), National Accounts, SNZ

Capital share Labour share

19

940

950

960

970

980

990

1000

1010

1020

2009 2010 2011 2012 2013 2014

Labour Cost Index for State Sector groups adjusted for inflation compared to the private sector

(June 2009=1000)

Private Sector

Education and Training

Health Care and SocialAssistance

Public Administration andSafety

Central GovernmentAdministration, Defenceand Public Safety

20

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

Real increases in Labour Cost Index in Public Sector compared to rest of economy since June 2009

21

0%

1%

2%

3%

4%

5%

6%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Annual increase in Labour Cost Index – health vs all

Health

All industries

22

24.00

26.00

28.00

30.00

32.00

34.00

36.00

Real total average hourly earnings(March 2015 $)

Public Sector

Public Administration and Safety

Education and Training

Health Care and Social Assistance

Private Sector

23

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

PublicAdministration and

Safety

Education andTraining

Health Care andSocial Assistance

Public Sector Private Sector

Increases in real total average hourly earningsMarch 2009 to March 2015 (March 2015 $)

24

0%

1%

2%

3%

4%

5%

6%

7%

8%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Annual increase in average hourly wage – health vs allAverage increase for year to quarter

Health Care and SocialAssistance

All industries

25

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14

How many times more likely a job on a CEA is to get a pay increase than a job not on a CEA

Calculated from LCI distribution of increases statistics and VUW Centre for Labour, Employment and Work CEA bargaining statistics

26

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

How many times more likely a job on a CEA is to get a pay increase than a job not on a CEA

Increase less than 2%

2-3%

3-5%

5%+

Any increase

Calculated from LCI distribution of increases statistics and VUW Centre for Labour, Employment and Work CEA bargaining statistics