This edition

Treasury on the economy, unemployment drops, interest rates, confidence up, Employment Relations Act amendments, new transport measures, energy outlook, the week ahead, overseas investment, high-speed Internet…and more.

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Molesworth and Featherston is compiled from informed political and business sources and published on Tuesdays to be New Zealand's most up to date business and political newsletter. You are reading the complimentary public edition.

Rebounding on

Treasury's October assessment of the economy for ministers is again predicting a strong rebound in the September quarter following the 0.2 per cent growth in June - something which will be buttressed by recent signs that the US economy is rolling again.

Ministers at Labour's annual conference last weekend were beginning to look to growth of close to 3 per cent in the year to march against 2.2 per cent forecast in the May Budget.

Treasury said growth was still being driven by domestic demand, and the net external sector was likely to improve from June, although solid import growth would partially offset a recovery in export volumes. Some support for exports was expected from the global growth pick-up, although it would take some time to flow through to export receipts. Trading partner growth was again revised higher in October (from 2.6 and 3.5 to 2.7 and 3.6 per cent respectively over the next two years) with data suggesting further increases in the months ahead. However the high exchange rate was acting as a drag on exports, and global monetary policy was about as stimulatory as it would get.

Treasury said domestic demand would continue to underpin robust growth, and there was no sign of slowing in the housing market. Its seasonally adjusted data suggested house sales grew 7.2 per cent in October, while the time taken to sell a house fell to a new record low median of 24 days. However the median dwelling price was flat in September at $215,000. Building consents in the third quarter were up 17 per cent on the June quarter.

On the immigration front, net arrivals in the year to September were 40,237. Short term visitor arrivals rose 7.3 per cent in the September quarter to a seasonally adjusted monthly high of 183,000 - expected to boost service sector exports.

Inflation was moderate at 0.5 per cent, but that masked a fall in tradables inflation (-0.4 per cent) and a rise in non-tradables (+1.3 per cent).

The rosier economic outlook was confirmed this morning by the release of data showing:

- Unemployment at a 16 year low of 4.4 per cent - down from 4.7 per cent in June and at 88,000 well shy of the politically important 100,000 mark (see next story).

- A Government surplus for the three months to September of just over $1.2billion dollars - well ahead of the $507 million Treasury had expected.

The surplus again throws doubt on Treasury's ability to forecast accurately in the current economic climate - it got it wrong all last year too - which is making Government planning difficult and skewing the debt market towards marginally higher rates than would otherwise be necessary.

Spending it

In the wake of the new numbers Michael Cullen stayed sullen on any extra spending, but we are told the growth rate to March will be increased to close to 3 per cent in the December Economic and Fiscal Update and Treasury is likely to flag about $900 million available for the Government's ‘poor package' against the $500 million currently being touted.

On the job

The significant drop in jobless numbers today confounded predictions.

Not a single forecaster surveyed by the DowJones newswire on Monday picked an unemployment rate below 4.8 per cent – a consensus that unemployment had increased from its low of 4.7 per cent.

But this morning Stats reported employment growth in the three months from July to September of 1.3 per cent.

At 4.4 per cent, unemployment is lower than it has been since 1987, and New Zealand has experienced sixteen consecutive quarters of employment growth. The Pakeha unemployment rate is 3.3 per cent, the Pacific rate is 6.6 per cent and the Maori rate is under double figures at 9.7 per cent.

Interest-ing response

With the release of jobs figures, the 90-day bill rate immediately cranked up, reaching 5.38 percent by midday (lock in your low interest rate now – the market is tipping a rise). The markets look as though they believe low unemployment rates still cause heartburn at the Reserve Bank, and that Dr Bollard will increase rates to suppress the inflationary effects of more jobs. The next MPS is still three weeks away.

The Australian Reserve Bank last week decided to increase its official cash rate, to 5 per cent (the same as ours). Australia has a CPI inflation rate of 2.6 per cent. Ours is 1.5.

Ring of confidence

Economists NZIER reports that a net 14 per cent of firms think general business conditions will improve over the next six months.

Three months ago, a net 13 per cent thought things would get worse in its Quarterly Survey of Business Opinion, and that was a significant improvement on the quarter before.

The strength of the housing market, inward migration and interest rates that are seen as low are thought to be behind the warmer fuzzies.

Act Now!

One of our estimable correspondents has been watching the slow disintegration of the Act Party, while wondering how to make a QUICK DOLLAR, and has struck on an idea which we can now bring to our readers as a SPECIAL OFFER.

Molesworth and Featherston today unveils an exclusive chance to be part of THE DEFAULTERS INDEX, a planned publication listing poorly-performing assets, bad and criminal directors and management, rip off schemes and general examples of bad business practice.

Anyone wishing not be included should send a large, but unspecified, amount of cash to the editor. If all goes well, and all those likely to be included come to the party with due generosity, this invaluable tome will never appear, our costs will be kept to a minimum, and everyone will be happy.

Of course there are considerable start-up costs and international best practice to be researched before we can even begin to run the presses. So drawing on the wide resources of the state we shall be flying to Asia, courtesy of a Trade and Enterprise grant, to research defaulters registers there. With the help of Te Puni Kokiri we hope to establish the Aotearoa Mana-free Publishers Investment Group (AMP Investment Group for short – we trust that will not cause any confusion) to link other writers of like mind.

Our head office has been scoped for a small strip of land we have an interest in just outside Wellington's Westpac Stadium – providing Government red tape can be overcome and the current owners, Tranz Rail, can be persuaded in the interests of capacity building to shift some scrap metal a few hundred yards inland.

Yes those Act politicians have certainly given us a new lease of life and a renewed commitment to SELF-HELP.

Hit the road

With the Land Transport Management Bill out of the way last week, attention now turns to two further pieces of transport-related legislation planned by the government before Christmas.

One will be a suite of measures related to enforcement. It's likely to include demerit points for speed cameras fines (ulp! – ed.) and may include a reduction in the permissible levels of booze per body.

The second will put in place a new governance regime for Auckland's transport- and a means of paying for the new transport infrastructure.

The governance arrangement will centralise in one body responsibility for Auckland's road network. It will replace the current fragmented structure, which includes the territorial local authorities, Infrastructure Auckland, the ARC and more mayors than a stallion's stag party.

The funding options – which we've reported previously – include using the government's platinum line of credit to borrow – but shifting responsibility for servicing the debt over to the local authorities, so that they take the political hit for user charges.

While the package is focused on Auckland it will be sufficiently generic to be picked up by other local authorities, although it is acknowledged that tolling options will be more economic in Auckland than in less densely populated regions.

Powering up

Wholesale electricity prices will increase by around thirty per cent over the next twenty years, the Ministry of Economic Development projects in its new Energy Outlook to 2025.

It sees wholesale prices rising to around 8.4 cents per kWh in 2025.

We are going to need another 3355 MW of electricity generation capacity, which will be made up of 890 MW of hydro, 630 MW of geothermal, 635 MW of wind, 350 MW of cogeneration, 800 MW of gas combined cycle (GCC), and 50 MW of distillate.

To put this into perspective, the government's total reserve generation capacity will amount to 4-500 MW – a capacity certain to be exhausted quickly unless large quantities of new generation are built to meet even the demand predicted on MED's conservative projections.

As a proportion of our total energy use, gas and hydro will decline, geothermal and coal generation will grow significantly and wind will jump (from currently almost nothing) to about 5% of generation.

Energy Outlook is the government's main reference document for energy sector policy.

Slightly naughty MED assumptions on which the projections are based include:

- The economy won't grow as quickly as targeted in the government's Growth and Innovation Framework (the Outlook predicts a modest 2.5% GDP growth for the next twenty years);

- The forestry industry will fail to meet the expansion targets set out in MED's own Wood Processing Strategy; and

- A carbon tax will be levied from 2008 at $15/tonne.

Other assumptions in the report include - oil prices rising by a quarter (to US$25 a barrel), a constant exchange rate at 50 cents US, Pohukura and Kupe gas available from 2007-08 and new gas discoveries from 2011, coal prices rising 14% from 2013, and much greater energy efficiency.

Not only do we use more energy as our economy grows, MED says we are using more existing economic output: In 1970 we consumed 3.9 petajoules of energy for every billion dollars of GDP. Last year, we used 4.8. MED predicts that, as Methanex winds down, our usage will decline to 3.1 petajoules for every billion dollars of economic output.

MED believes that energy demand will be lower than the historical trend because we are more aware about energy efficiency and because of the carbon tax.

Labouring on

There is still no sign of the planned amendments to the Employment Relations Act, although Labour Minister Margaret Wilson is now assuring unions it will be in the House before Christmas.

The sticking point continues to be the transfer of undertakings clause, although there are smoke signals that the Service and Food Workers Union will get some concessions in its push to have workers' conditions protected beyond the first sale or transfer of a business or contract - the so-called succession issue. That is, however, likely to see a narrowing in the scope of the transfer of undertakings clause. As first planned it would have applied to all workers, not just the poorer and more vulnerable ones.

The week ahead

Parliament will continue to rumble through the details of the new dog control laws this week, and will make progress on the smokefree pubs and restaurants law on Wednesday, which is a private members day. Still on track to pass this by year's end.

Retail trade figures will be released on Wednesday along with Stats' Accommodation survey, and on Thursday food price inflation figures will be released.

Credibility issue

Just a thought because no one else has raised it…

National has taken to describing the Labour-Progressive minority coalition as ‘the Labour/Anderton/Green government'.

Now, although the Greens have a formal legislation agreement with the government to support some legislation, they voted against the government on confidence and supply.

The United Party, with whom the new leader of the National Party seeks to form closer relations, provides the government with confidence and supply.

Does Dr Bash not know the composition of the government he is opposing?

When the National Party vows to remove the ‘Labour/Anderton/Green government', does it mean to be rid of United Future as part of the formula? Perhaps it is a topic for Dr Brash's chats with PM-in-waiting) Dunne?

Or by mis-labelling the government, is Dr Brash saying that some parts of this government-that-must-be-removed are not so bad?

Some economic fundamentals on overseas investment

The review of overseas ownership of sensitive land throws up some underlying issues.

First of these is that New Zealand has not recorded a surplus on our current account for thirty years (that's our trade with the rest of the world). It is axiomatic that the deficit on our current account has to be made up from the capital account – either we sell assets or debt. Although we sell a lot of debt, we are going to have to sell high value assets as will if we want to keep living beyond our current means. If we stop sensitive land – like coastal property and high country farms - to foreign buyers, we will have to sell other assets, or start importing only as much as we export.

Countries with a high standard of living tend to be a lot less anxious about overseas ownership. That is because they can hope to buy the assets back.

The bottom line is that if New Zealand really wants to keep our assets, and enjoy a living standard comparable to other developed countries, then we are going to have to earn a lot more money in the world. Until we do earn more, we are going to have to make choices.

BCL moves into wireless broadband

State-owned Broadcast Communications (BCL) announced today it will spend $25 million to move into high-speed wireless internet in Northland, South Auckland, Franklin, Waikato, Bay of Plenty, Manawatu, Wairarapa, Taranaki, Canterbury, Otago and Southland.

The announcement marks the return of the state sector to the telecommunications business.

It is supplying a wholesale service, allowing other retailers to re-sell the BCL product at the same volume-based rate, and already Telecom, ihug and ICONZ have signed up. In practice the product is thought likely to threaten Vodafone/Walker Wireless most.

The entry into broadband is a major new direction for the company, which has provided services for TV and radio broadcasting. With the decline of terrestrial analogue broadcasting (and the rise of Sky TV) BCL has needed a new business stream ever since the government refused to allow TVNZ to compete against Sky TV in digital TV. Telecommunications are a logical step, though significantly riskier. It is likely an alternative government would have wished to sell BCL now (as Treasury desired) and would almost certainly not have allowed it to enter telecommunications.

Quote of the week.

“I wonder if the yellow ducks will have to pay to be in the book.”

Finance Minister Michael Cullen, on plans by ACT MP Deborah Coddington to publish a children's book, ‘the Little Yellow Duck of Freedom' about the plastic ducks lost from a container ship and floating across the world's oceans.

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