economics

The economy - how is NZ shaping up for a recovery?
Radio New Zealand's Nine To Noon programme

Jan 27, 2010

Shamubeel Eaqub, Senior economist at the New Zealand Institute for Economic Research and Robert Reid, General Secretary of the National Distribution Union.

LISTEN ONLINE: Click here to listen to Robert Reid being interviewed on Radio NZ. 

A quick start on a replacement for the Kopu Bridge near Thames and a big boost for state house building and refurbishment are set to be key parts of the Government's $500 million infrastructure package announced today.

In the first parliamentary sitting of the year, Transport Minister Steven Joyce signalled that an announcement on the one-lane Kopu Bridge would be in the package aimed at preserving jobs and easing the impact of the recession. The bridge is expected to cost more than $32 million.

Prime Minister John Key said the package would include spending on state highways, school property, and state housing. "They are projects that will be ready to start and get under way as soon as possible."

The Transport Agency had set a start date of mid-2011 for a 500-metre-long Kopu replacement bridge, though Labour had said it would bring that forward to 2010.

Mr Joyce said last month that he wanted to get the project going possibly before the end of next year a move that could be particularly popular among Aucklanders wanting faster access to Coromandel. Queues up to 10 kilometres long backed up at the 82-year-old bridge during the Christmas break.

Mr Key indicated again yesterday that a big push would be made on insulating and upgrading state housing, which the Government believes will help retain jobs across the regions and improve the health of tenants.

In response to Greens co-leader Russel Norman, who has criticised National's dumping of a $1 billion house insulation plan, he said today's package would cover insulation, energy efficiency and climate change. "We will be creating jobs in our economy and they will be jobs that not only have a consideration for economic growth and providing good wages for those who are in them, but also will have an eye to ensuring that environmental responsibility is taken seriously by our Government."

Housing Minister Phil Heatley said last year there was up to $2 billion of deferred maintenance on Housing NZ's books. He also indicated an increase in the number of state houses.

Further roading projects, including extensions to the Waikato Expressway, and the Puhoi motorway north of Auckland, are likely to be included in another package this year.

Labour leader Phil Goff said Mr Key was bragging about his plans while not acknowledging that Labour's 2008 Budget and other measures proposed by the previous government made up three-quarters of the stimulus package.

High food prices may be helping supermarket operators.

Australia's Woolworths, the second largest supermarket operator in New Zealand, today reported sales here increased by 10.6 percent in the June quarter, although only 2.2 percent when normalised and an extra week's trading is excluded.

Comparable sales rose 3.5 percent, which Woolworths said reflected tighter macroeconomic conditions and a decline in the growth of the overall market. The company reports profits next month.

Yesterday, Statistics New Zealand reported food prices in the year to June leapt 8.2 percent, the highest rise in 18 years.

Woolworths bought Progressive two years ago and runs the Foodtown, Countdown and Woolworths brands, whose combined sales rose 7.3 percent in the June year to $4.9 billion.

Chief executive Michael Luscombe said the New Zealand operations were off to a better start this new fiscal year despite his earlier comment that there is "no doubt that New Zealanders are doing it tough", as weak economic conditions persist.

Mr Luscombe said economic cycles come and go and he believes that New Zealand will recover. "We want to be ready for when that happens," he said.

Woolworths said its overall food inflation for the quarter in NZ was 4.6 percent, an increase from the 3 percent experienced in the third quarter, "reflecting increased price pressure on certain products in perishables and bakery and the ceasing of price deflation in produce". Sales growth has declined from 9.9 percent in the first quarter, 5.7 percent in the second and 6.2 percent in the third.

Australia's biggest retailer reported group sales worth nearly half of New Zealand's GDP. Sales including NZ, for the 53 weeks ended June 29, rose 10.7 percent to $A47 billion (NZ$60 billion). Mr Luscombe said fiscal 2008 earnings before interest and tax (EBIT) were expected to grow faster than sales while net profit is expected to grow in a range of 21 per cent to 25 percent. On a normalised basis, which removes the impact of the 53rd week, sales were up 8.7 percent.

Woolworths has been taking customers from rival Coles, which is undergoing a major facelift under new owner Wesfarmers, which has said it will take about five years to turn around Coles. Mr Luscombe said trading in fiscal 2008 has been extremely rewarding with the business performing well overall. "The significant re-investment in each of our businesses will continue to drive future growth," he said. "These key investment initiatives include the rollout of our 2010c format stores in supermarkets and our new format BIG W, which are both progressing well."

Woolworths is still awaiting a Court of Appeal decision on whether the Commerce Commission can both Woolworths and Foodstuffs from making takeover bids for The Warehouse. New Zealand-owned Foodstuffs and Australia's Woolworths each have 10 percent stakes in The Warehouse and successfully went to the High Court to overturn the commission's decision to block any potential takeover. The Commerce Commission appealed that decision and the court case was completed in early May. Interested parties expected a decision last month.

Group supermarket sales rose to $A40.313 billion in the year, to be up 8.3 percent on a normalised basis. Sales for the Australian food and liquor business climbed 9.9 percent to $A30.5 billion in the year, with comparable sales up by 6.3 percent. Woolworths opened 30 new Australian supermarkets during the year to bring its total to 780 Australian supermarkets, and 89 Dan Murphy's liquor stores.

Woolworths also owns the Dick Smith electronics chain. Fourth quarter sales in consumer electronics rose 16.3 percent, boosted by 5 new store openings in the quarter. Comparable-store sales rose 3.8 percent.

Finance Minister Michael Cullen has given his strongest call yet for a fundamental change to monetary policy, saying it is harming long-term growth by discouraging investment in exporting.

"The accepted consensus has been that ... monetary policy helps keep the economy stable by moderating economic cycles, without impacting on the sustainable rate of growth of the economy.  My overriding concern is that this view no longer holds," he said in notes for a speech to accountants Ernst & Young yesterday.  "We need to look seriously at the monetary policy framework and whether it can be made more effective at curing the inflation disease without killing the patient in the process."

He later told The Dominion Post he and the Reserve Bank were at odds.  "Oh yes, I have doubts about that consensus. I think it is probably the view the Reserve Bank would still hold but it's not a view that I would share."

Despite the dollar's recent fall, it was still much higher than was justified by medium-term fundamentals - and had been for much longer than in previous economic cycles, he said.  "That can have an effect on how people see the long-run returns to exporting and there's a risk that people decide that exporting or investing in exporting is simply not worth the effort."  He expected the current select committee inquiry into monetary policy to look at the issue.

National finance spokesman Bill English has rejected options for change, including a mortgage levy and ring-fencing losses on investment properties.  He has suggested the current interest rate tool would be sufficient.  However, Labour probably sees political capital in opting for change, leaving National to defend the status quo at a time when exporters are being hit by a high dollar and interest rates are pushing up housing costs.  Both main parties have identified affordable housing as a key election battleground.

Dr Cullen said yesterday that his cash surplus for the past financial year would be higher than forecast on Budget night, reinforcing the view that he was running the tightest fiscal policy of any party.  "When you add up government spending and subtract taxation, and the investment we are making in the New Zealand Superannuation Fund, the Government is removing demand from the economy."

KiwiSaver would also reduce pressure on monetary policy.  "If we save more, we consume less."

Mr English said the improved cash surplus signalled Dr Cullen was preparing an unprecedented election year spend-up.  "It's called lollynomics."  He said Dr Cullen continued to blame others for high interest rates and high inflation caused by his economic management.

Massey University business researcher Claire Massey stated in The Dominion Post that lifestyle and mum and dad firms are just as valuable to the economy as embryonic multinationals . For New Zealand Trade and Enterprise, supporting the mums and dads and more ambitious businesses is not an either/or – we have to do both.

New Zealand is a country of small businesses. We don't have enough big ones. From a national economic perspective it's misleading to present it as a competition and it creates a misunderstanding of NZTE's priorities and activities.

Which makes a bigger contribution towards increasing the wealth of all New Zealanders – a local shop selling to the local market or a similarly sized export business taking New Zealand products to world markets? From NZTE's point of view it's got to be the exporter, though that doesn't mean the needs of other businesses are ignored.

So, for local economies what Professor Massey says is true. But it's not clear that the activities she refers to will increase the wealth of the nation. The question for NZTE is: How do we quickly extract the biggest possible amount of economic growth out of our $180 million annual budget for the benefit of all New Zealanders? Professor Massey sets out one option – spread ourselves thinly and support as many small businesses as possible in what she calls a bottom-up approach.

Business size is not an overriding factor in our decisions on who to support. Ambition to expand matters a lot more.

All the same, a business with a turnover of $100,000 growing 10 per cent is not as valuable to the national economy as a $1 million business growing at the same pace. And a business wanting 50 per cent annual growth is potentially more valuable than a less aspirational one.

Also businesses that export help make the economic cake bigger in a way that domestically focused ones cannot by taking advantage of the much larger growth opportunities available on world markets. A critical element in export growth is the type of jobs they tend to generate.

For most New Zealand businesses, major international opportunities revolve around using technology and innovation to add value to their products and services. To do this they need skilful workers. Paying the minimum wage is not an option. These realities drive what NZTE does on the ground. It explains why we spend about 60 per cent of our operating budget overseas and about half our grant funding on international market development. The percentages devoted overseas are increasing.

When NZTE started in 2003, grant funding available to help businesses developing international markets was $7.6 million. Now it is more than $60 million. Most recipients of this support are small businesses. Last year we had 659 high growth clients on our books. Nearly half had turnover of less than $3 million.

Professor Massey also suggests NZTE is only interested in these businesses. A look at NZTE's activities shows this is not so. Last year 13,000 small businesses took part in NZTE training courses, there were 121,525 unique visitors to our biz.org.nz website and the Biz 0800 Contact Centre and our regional offices received 17,740 calls.

If you add in the companies benefiting from broad NZTE programmes such as the regional and sector initiatives and event support, it is clear that NZTE is helping a large percentage of New Zealand businesses. In 2006-07 NZTE spent $11.7 million on business training and capability building and $7.3 million on information and advice.

These services are available to all New Zealand businesses though they are often delivered through other organisations. Many businesses probably don't know the funding comes from NZTE – which may explain the 15 per cent figure reached by the Massey University researchers.

The balance between what NZTE does to support all New Zealand businesses and high growth ones and between our overseas and local work is a source of debate. But NZTE recognises it has to help ensure that there is a healthy and resilient base of companies in New Zealand. From this base will come the companies with the desire and ability to take advantage of opportunities for out-of-the- ordinary business growth – the embryonic multinationals.
# Tim Gibson is New Zealand Trade and Enterprise chief executive.

Government departments are elitist and ignorant when it comes to helping small firms, one of New Zealand's leading small business experts says.  Massey University professor Claire Massey has criticised the Ministry of Economic Development (MED) and New Zealand Trade and Enterprise (NZTE) for ignoring most of New Zealand's small businesses.

Massey targeted the Government organisations' definitions and the policies they used to interact with small and medium enterprise (SME).  "They are using a construct -- the business life cycle -- which comes from large firms. If that is the only framework you use to look at small businesses, it misses the point," she said.

SMEs made up 99 per cent of New Zealand's business community, yet NZTE only dealt with the top 4% -- firms with at least 20% growth over five years.  "We love to see David beat Goliath, to see Icebreaker, Weta and Trade Me take New Zealand to the world. But most New Zealand firms are not like this," she said.  "We have to stop griping about lifestyle businesses and mom and pop firms as if they were a bad thing. They are not all embryonic multinationals, but they are just as valuable to the economy," Massey said.

The focus also missed the real force behind eight out of 10 businesses -- that of the owner.  A 2005 survey by Massey University showed less than 15% of small firms had got any help from MED or NZTE, and many knew little about what was available.  "They don't seem to mind being treated like second-class citizens, while we run around looking for the next Sam Morgan," Massey said.  While NZTE had $180 million a year mostly devoted to businesses with up to 100 staff, they blamed budget constraints for the fact they only interacted with the top echelon of those, Massey said.

But if that attitude was adopted within other Government responsibilities, such as education, it would be intolerable, she said.  "That's like dealing only with A students. It is easy to make a success out of A students."  New Zealand was not alone; most countries had an ill- thought out approach to small business development, she said.  "Countries just say `What should we be doing, let's focus on high growth.' There's not much sophisticated thinking going on there."  Taiwan -- "one of the development miracles of the world" -- had a bottom-up approach to development, putting the majority of their resources into small business, acknowledging that was where the growth potential was.  "That completely woke me up, they are doing the exact opposite of what we are doing," Massey said.

A MED report last month on structure and dynamics in SMEs showed that firms with 20 or less employees accounted for nearly 60% of new jobs in New Zealand from 2001 to 2006.  The findings showed firms with up to five workers comprised 87% of New Zealand enterprises, contributed 30% more new jobs than firms with 500 or more staff and made twice as much real profit per employee than any other sized grouping.

Encouraging the owners of "low-growth" businesses would have a massive effect on the economy, because even a small change in productivity over the large grouping would have a big upside, Massey said.

Wellington economist Gareth Morgan is calling on the Government to clean up the fund management sector and make KiwiSaver "safe" to invest in.  "This government has to clean up the industry before it hands the heads of four million Kiwis to it on a platter," Dr Morgan said.

Savers might be seduced by tax breaks and employer levies in the form of KiwiSaver announced in last week's Budget, Dr Morgan said.  Dr Morgan called for government regulation to protect savers from fund managers contracting out of their fiduciary positions of trust and creating reserves that might be lost to some savers.

He is offering his own KiwiSaver scheme and has pointed out that money in KiwiSaver schemes is not government-guaranteed.  "There is no guarantee as to the safety of your money, no undertakings whatsoever as to the returns you can expect, and it is delivering you holus-bolus into the arms of the long-term savings sector."

Finance Minister Michael Cullen confirmed last week that KiwiSaver would not be government-guaranteed, and a spokesman pointed out yesterday that there was no government guarantee in Australia either.

The spokesman for Dr Cullen said no one was being forced to save.  "If you have a guarantee, that would surely reduce the incentives for the fund managers to perform."

The Government had added requirements that KiwiSaver schemes be registered with the government actuary, and have certain disclosure and reporting conditions consistent with international standards.

Dr Morgan said if KiwiSaver underperformed, lost people's money or even took it, then that was "tough - buyer beware".

Fund managers have rejected Dr Morgan's recent criticism of the sector, saying KiwiSaver would be governed by strict regulations putting considerable onus on fund managers to operate in the best interests of investors.

KiwiSaver schemes were reviewed by the government actuary before approval, to ensure all fees and charges were fully disclosed and were not unreasonable.  The six default providers (AMP, AXA, ASB, ING, Mercers and Tower) have been reviewed by an independent, government-appointed panel.

The KiwiSaver Act contains provision for the government actuary to apply for cancellation of registration of a KiwiSaver scheme that fails to operate in an acceptable manner.

KiwiSaver products will be managed in accordance with a trust deed.  Several fund managers said recently that any suggestion that the sector would not be working in the best interests of investors and consumers or that it offered KiwiSaver products and service that were not best practice did not stand up to scrutiny.

Dr Morgan said yesterday that the Government had to make KiwiSaver safe to invest in, but that did not involve a government guarantee.

The life insurance sector should be forced to accept a fiduciary duty to its investors through KiwiSaver and should not be allowed to contract out of that through trust deeds.  The companies should not create reserves from savers' money that savers would never see again if they left the scheme or changed provider.

Economists are warning that KiwiSaver could pump up the already soaring housing market when employees start withdrawing money for their first home.

From July 2010, KiwiSaver members will be able to put their and their employers' contributions toward a first-home deposit. At the same time, they will be eligible for a Government subsidy of $1000 a year, capped at $5000.

Experts are warning that the scheme could cause a flood of money into the property market, boosting already high prices.

BNZ chief economist Tony Alexander said any subsidy such as KiwiSaver would put upward pressure on house prices, though the extent of this was impossible to predict.

Westpac economist Donna Purdue agreed. "Any kind of subsidy to housing is obviously going to push up house prices."

Mr Alexander said there was a school of thought that once people saw their savings grow, the desire to own a house would subside - but warned that had not happened in Australia, which had compulsory superannuation.

Finance Minister Michael Cullen said Inland Revenue would get $14.6 million to get tough on property speculators, ensuring they are paying tax in a bid to dampen their effect on the property market.

Workers on the average wage will be saving at least $100 a week by 2011 if they sign up for KiwiSaver, but the decision to force employers to contribute is likely to dampen pay rises.

After weeks of hints that the Government planned tax incentives to kick-start KiwiSaver when it goes live on July 1, Finance Minister Michael Cullen dropped a Budget bombshell with the news that employers will be made to contribute.

Under the revised scheme, workers who sign up for KiwiSaver - meaning they pay either 4 or 8 per cent of their gross pay toward retirement or a first home - will have contributions matched by the Government up to a cap of $20 a week.

Employers whose workers join KiwiSaver will be made to pay a further 1 per cent of their gross wages into accounts from April 1 next year, rising by 1 per cent each year to a maximum of 4 per cent by 2011. The Government will reimburse employer contributions up to a maximum of $20 a week.

The plan means that by 2011, workers on the average wage - expected to be about $52,000 - will be saving at least $40 a week, with $20 a week from the Government and $40 from their boss.

Workers who put aside 8 per cent of their pay will be saving $140 a week.

The Government subsidy will also apply to people not in work - such as stay-at-home parents and students - who independently open accounts, provided they contribute $20 of their own.

Everyone who opens a KiwiSaver account will also get a one-off $1000 kick-start and those who use accumulated funds to buy a first home will receive government grants of between $3000 and $5000.

From July 1, all new employees will be automatically enrolled in KiwiSaver, though they will be able to opt out.

Employers must also offer schemes to all existing employees. The Treasury estimates up to 50 per cent of all workers will join.

The plan received a hostile response from business groups and was attacked by National, which said the plan would punish the lowest-paid who could not afford to sign up.

"In the end there is only one group of people who will pay the bill for all of this, the average New Zealand wage and salary-earner and the lower-income self-employed," finance spokesman Bill English said.

National leader John Key said employers would use compulsory contributions to deny or resist pay rises.

Dr Cullen conceded that compulsory employer contributions were expected to be taken into account in wage rounds, but said the scheme would address New Zealand's current account deficit - the difference between what the country spends and earns overseas.