The Letter – Monday, 13 March 2006

The Letter – Monday, 13 March 2006

The Letter – Monday, 13 March 2006

The Letter Limited - www.theletter.biz

The Haps

With Parliament on a one week recess politics took a break. The Reserve Bank Governor also decided to do nothing.

The Economy

Reserve Bank Governor Alan Bollard has held the Official Cash Rate at the highest in the developed world at 7.25% and has said that he does not expect to raise or ease interest rates this year. Economists say the Reserve Bank does not want trading banks to anticipate the easing of interest rates and lower house mortgages, thereby igniting the housing market. The market seems to expect that inflationary pressures will ease and the Reserve Bank will lower interest rates by September.

Our View

As readers know we are strong critics of the Reserve Bank. The Governor has failed to keep inflation below 3%. The Bank should have acted earlier and more strongly. The failure do anything in the run up to the election shows it is not "independent". It continues to be cowardly in its refusal to criticize growth in government spending, inflationary government sector wage increases and local body rate increases.

Labour Market

We believe the Reserve Bank is right to be concerned about the labour market. The labour cost index in all sectors had its sharpest increase in 12 years, up 5.8% to December. Public sector wages increased 3.9%. The Reserve Bank, once again, ducked the opportunity to criticize the government's inflationary plans to increase the minimum wage and abolish youth rates. Last week's massive increase in judges' superannuation is just part of a trend to increase public sector salaries faster than the private sector.

International issue

The pressure on wages is going to continue. Those with skills are facing higher mortgages, fuel costs and prices while at the same time becoming aware of their ability to demand higher wages. We hear many stories. A group of semi skilled construction workers left three years ago for Australia and found even bigger wages working on mining sites in the outback. A NZ recruitment firm has offered them even more wages to return. Of course they have told their families and workmates (who never left) who realise they can now demand an international level of wages. The number of strikes rose last year and we think union militancy is going to increase.

It is worldwide

There is a skill shortage in the USA and Europe. We are not immune to this realignment of pay rates. Using this as an excuse to lift unskilled rates is just a recipe for disaster.

We are losing skills

We do not agree with the Reserve Bank's sanguine view that the recent dip in immigration is temporary. Unless it knows about an unannounced change of policy (possible but with Peters in government unlikely) the present policy has lowered numbers of immigrants and the migration of New Zealanders continues unabated.

We are leaving

21,439 New Zealanders left for Australia in the year to January 2006. 15,000 left the year before and 10,000 the year before that. With a growing wage differential and a slowing NZ economy we see no reason why this year's numbers will not increase.

Housing market

Private surveys of the residential housing market show that it will contract over the next two years. As NZ'ers are starting to learn, house prices can fall. In this publication we have been predicting a fall in household formation in the coming year, a key driver of house prices. The market is also about to discover that prices do not fall evenly. As the economy slows the wealth effect of rising house prices reverses, so households are worth less. Then discretionary expenditure falls. A very discretionary expenditure is the second house. Over the last five years there has been a huge increase in coastal subdivisions. It is safe to predict that the boom in prices is over. As some highly geared developers are forced to sell, we expect to see a slump in poor quality coastal section prices.

Parliament Resumes

Expect to see National continue its attacks on Helen Clark's using of her taxpayer parliamentary funds to finance Labour's election. In most countries with a "rule of law" Clark would be facing criminal prosecution.

Keep them Locked Up

Labour has been running a PR campaign expressing shock at prison numbers, the cost of jails and how the policy has "failed". Tougher sentences were always going to mean more inmates. There has been an explosion in prison building costs. Apparently the government is the only one who does not know building costs have been rising at 10% a year for three years. The government has set up not one but two inquiries into the cost of building prisons. But who says the tougher sentencing policy has failed? The rate of serious crime is falling and the reason is simple, more criminals are behind bars.

Flat Tax

Our comments on the possible reasons for NZ's poor export performance continue to result in many reader emails. A reader sent us this article by Steve Forbes on the success of flat tax in Central Europe. www.theletter.biz/flattax

Our Poll

99% of readers think that the Speaker should refer Benson-Pope to the Privileges Committee. This week's poll; let's see how credible the Reserve Bank is. "Do you believe the Governor when he says interest rates will not be decreased this year or are the economists' right and rates will fall in September?" Vote at http://www.theletter.biz/vote. The market will be interested in the results.

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