Brian Gaynor 's Opinion

Brian Gaynor is a Weekend Herald columnist.

Brian Gaynor: Good and bad news in nation's report card

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Economy is growing but without creating new jobs

Economic benefits from the Canterbury earthquake rebuild are being offset by the effect of this summer's drought on agricultural production. Photo / Greg Bowker
Economic benefits from the Canterbury earthquake rebuild are being offset by the effect of this summer's drought on agricultural production. Photo / Greg Bowker

The good news this week was that the New Zealand economy grew by 1.5 per cent in the December quarter and by 2.5 per cent for the full year, the best year since 2007.

However, the bad news is that this upturn in economic activity is not creating new jobs and the country's current account deficit, which is the difference between our total overseas income and expenditure, is beginning to rise again.

The domestic economy grew by 1.5 per cent in the December quarter compared with the September quarter.

This was materially above the Reserve Bank's projections of 0.8 per cent and the median market expectation of 0.9 per cent.

There were strong contributors to the latest quarter including agriculture, forestry and fishing, which rose 2.6 per cent compared with the previous quarter, and retail trade and accommodation, which expanded by 2.3 per cent.

Although economic growth was better than expected, economists do not expect the Reserve Bank to raise interest rates until later this year, or early next year, mainly because of the drought.

The outlook for the current year is mixed, with the Canterbury earthquake rebuild continuing to gain momentum but the drought will have an effect on agricultural production.

The Reserve Bank believes the drought will reduce GDP growth by 0.2 to 0.3 per cent this year but this prediction will have to be raised unless there is significant rainfall over the next four to six weeks.

The latest Consensus Forecasts Report, which was released by the New Zealand Institute of Economic Research (NZIER) on Monday, stated: "Economic growth will average 2.5 per cent over the next three years [and] the Canterbury rebuild will be the key driver, although it will be more protracted than previously thought.

"The job market is softening. Forecasters expect slow job growth and unemployment to remain higher for longer. Real wage growth will be subdued.

"A slow recovery means inflation will remain subdued," the report said.

"Forecasters expect interest rates to be lower for longer, with gradual rate increases expected from late 2013.

"These forecasts do not yet incorporate the effects of a worsening drought.

"The 2008 drought reduced economic activity by 0.5 per cent but this drought could be more damaging."

The NZIER survey noted that one of the biggest problems facing the New Zealand economy is the lack of job growth, as demonstrated in the accompanying table.

Total employment has declined by 22,800 over the past four years, from 2,227,900 to 2,205,100, and the economy lost 31,900 jobs last year even though GDP grew by 2.5 per cent.

These figures indicate there has been a material increase in productivity but that is not much consolation for young people looking for stimulating careers at home.

Statistics New Zealand divides the employment data into 16 different sectors. The sectors with the biggest losses since the end of 2008 were:

• Manufacturing, which lost 27,800 jobs.
• Retail trade and accommodation, 15,300 jobs.
• Construction, 12,600 jobs.
• Wholesale trade, 7600 jobs.
• Rental, hiring and real estate services, 5700 jobs.

The sectors with the biggest gains were:

• Healthcare and social assistance, which has added 23,900 jobs.
• Finance and insurance services, 7800 jobs.
• Education and training, 5500 jobs.
• Public administration and safety, 5400 jobs.
• Information media and telecommunications, 3400 jobs.

The Australian economy has created 676,600 new jobs while the New Zealand economy has lost 22,800 over the past four years.

There has also been a substantial loss of manufacturing jobs across the Tasman but this has been more than compensated by increased employment in healthcare and social assistance, which created 222,800 new jobs over the past four years, professional, scientific and technical services, which has added 143,200 new jobs, education and training 109,300 and mining with an additional 97,700 careers.

Australia is creating more professional, scientific and technical jobs and this is attracting highly educated immigrants from around the world, including New Zealand.

One of the more interesting developments is the small increase in employment - just 3400 additional jobs - in the information media and telecommunications sector in New Zealand over the past four years.

This is also a no-growth area across the Tasman as the sector has experienced a 9700 reduction in employment since the end of 2008.

Information technology and telecommunications are considered to be growth areas but a number of the large telecommunications companies, including Telecom and Telstra, are under pressure from falling prices and increased regulation.

As a consequence they are being forced to shed labour to maintain profitability as demonstrated by media reports regarding up to 1500 potential job losses at Telecom.

The current account or balance of payments statistics, which were also released this week, show that the deficit has steadily increased from $4.503 billion in 2009 to $10.509 billion in 2012.

The current account comprises four categories:

• Goods - exports minus imports.
• Services - all intangible transactions such as payments and receipts for transport, tourism, business services, licences and other items.
• Investments - the difference between dividends and interest received and paid on New Zealand's overseas investments and foreign investment in this country.
• Transfers - mainly workers' remittances, donations, overseas aid, pension flows and donations.

The two most important items as far as New Zealand is concerned are goods and investments.

The goods surplus fell from $3.599 billion in 2011 to $1.012 billion in 2012 because of a decline in exports, mainly due to lower dairy prices and oil exports.

The goods balance is expected to deteriorate further in the current year because the drought will adversely affect agriculture production, the high NZ dollar will continue to have an impact on manufactured exports and imports will increase because of the demands for heavy equipment associated with the Canterbury rebuild.

The services sector deficit could also expand because the travel industry will continue to be impacted by the high NZ dollar.

The investments deficit, which has fallen slightly in the past 12 months, is still the biggest problem as far as New Zealand's current account is concerned.

This is because overseas interests have $310.9 billion invested in this country whereas we have only $160.9 billion invested overseas.

In addition the returns on NZ investments are much higher than we are receiving from our overseas holdings.

As the domestic economy improves, and dividends increase, the investment deficit is likely to increase. This is why the sale of any Mighty River Power shares to foreign investors is not in the country's best interests.

The payment of dividends by the electricity generator to overseas shareholders will have a negative effect on the investments category of the current account.

The Mighty River Power share sale will have no effect on the current account balance if all of the shares are distributed to New Zealanders.

Finally the country's gross overseas debt has stabilised in the $250 billion to $260 billion range, partly because we are selling assets, rather than borrowing, to finance the current account deficit.

Total overseas debt represents 123 per cent of GDP compared with 254 per cent in France, 207 per cent in Portugal, 179 per cent in Greece and 170 per cent in Spain.

However, we cannot be complacent as a chronic current account has to be financed by either borrowings or the sale of assets and we cannot continue to rely on these two strategies to finance the current account deficit on a long-term basis.


Brian Gaynor is an executive director of Milford Asset Management.

- NZ Herald

Brian Gaynor

Brian Gaynor is a Weekend Herald columnist.

Brian Gaynor has written a weekly investment column for the Weekend Herald since April 1997. He has a particular particular passion for the NZX and its regulation. He has experienced - and suffered through - the non-regulated period prior to the establishment of the Securities Commission in 1978 and the Commission’s weak stewardship until it was replaced by the Financial Markets Authority (FMA) in 2011. He is also a Portfolio Manager at Milford Asset Management.

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