Economic Week - July 12

by Nick Clark

June fall for food prices
Food prices slipped 0.7% in the month of June, according to Statistics NZ’s Food Price Index, leaving food prices only barely higher than the same time last year.
Comparing June 2019 with May 2019:

  • Fruit and vegetable prices fell 2.1% (with fruit down 7.1% but vegetables up 1.7%);
  • Meat, poultry, and fish prices fell 0.1% (with beef and veal up 0.4% but mutton, lamb and hogget down 4.2%); and
  • Grocery food prices fell 0.7% (with bread and cereals down 1.2% and milk, cheese and eggs down 1.5%).

On an annual basis, comparing June 2019 with June 2018, food prices increased 0.5% overall, with: 

  • Fruit and vegetable prices down 8.8% (with fruit down 3.4% and vegetables down 12.3%);
  • Meat, poultry, and fish prices up 2.8% (with beef and veal down 2.0% but mutton, lamb and hogget up 0.1%); and
  • Grocery food prices up 1.8% (with bread and cereals up 0.6% and milk, cheese and eggs up 3.9%).

Farm inflation rising
Food price inflation might be near zero and consumer price inflation might only be around 1.5%, but inflation of farm expenses is tracking higher.
According to Beef+Lamb NZ’s Sheep and Beef On-Farm Inflation Report, sheep and beef farm input prices rose by 3.0% for the year to March 2019, twice as fast as consumer price inflation.  Excluding interest costs the annual inflation rate was even higher at 3.5%.
The biggest three expenditure categories – shearing expenses (up 11.2%); fertiliser, lime, and seeds (up 6.2%); and council rates (up 5.1%) – contributed substantially.  Weed and pest control was the only category that fell, down 0.2%.
After being flat or falling for the years from 2012/13 to 2016/17, inflation has made a comeback over the past two years.

‘Fair pay’ agreements won’t work
This week think tank the New Zealand Initiative released a report Work in Progress: Why Fair Pay Agreements would be bad for labour.
The Government’s Fair Pay Agreements Working Group has proposed replacing New Zealand’s existing labour market regulations with a system of Fair Pay Agreements (FPAs). This would allow minimum terms and conditions of employment to be set across whole industries or occupations. An FPA process would be triggered if either a “public interest” test is met, or if the lower of 1,000 workers or 10% of the workers in an industry or occupation are in favour of commencing negotiations for an FPA.
Union representation in negotiations would be compulsory for workers. Employers would have to be represented by industry or employer organisations. If agreement could not be reached in negotiations, a statutory body would determine the outcome for the entire industry or occupation (with only limited, temporary exemptions).
The report does a great job demolishing mythical shortcomings of the current system which have been used to justify change.  It makes strong cases against FPAs.  These include:

  • A significant risk of slower productivity growth from FPAs locking in inefficient practices and reducing labour market flexibility.
  • If FPAs are successful in forcing up wages, FPAs could cause job losses in firms unable to recoup the costs of higher wages, with the burden likely to fall most on the less skilled and younger workers as well as those already unemployed.
  • FPAs will take away workers’ freedom to choose not to be represented by unions in their wage negotiations.
  • Consumers will suffer from firms increasing prices for goods and services to recoup increased labour costs arising from FPAs. Higher prices will be felt most acutely by the least well-off.

And let’s not forget the industrial unrest of the 1970s and 1980s which incurred huge costs and disruptions not just for businesses directly affected but those, like farming, dependent on industries like dairy and meat processing and road, rail, and maritime transport.
The report concludes that a more productive, higher-wage economy will not be achieved through introducing compulsory collective bargaining across industries and occupations.  What will make a difference is getting our policy settings right in areas like education, housing and planning, infrastructure, foreign investment, social policy, regulation and the allocation of regulatory decision-making powers between local and central government.  That mightn’t sound sexy but good public policy seldom is.
As the Government considers its decision on whether to introduce FPAs this report should be compulsory reading.

Thank you
Thanks to all who have completed the Farm Confidence Survey.  We’ve had a great response and we expect results around the end of July.

Next week
Next week sees the release of the consumer price index for the June 2019 quarter.  The annual rate of increase is expected to edge up slightly to 1.7% on the back of higher petrol prices during the quarter.  There is also another Global Dairy Trade auction.

NIWA Soil Moisture Data
NIWA’s latest soil moisture maps (as at 9am Thursday 11 July) continue to show most of the country with about average soil moisture conditions for the time of year.  The most striking exceptions for dryness appear to be inland Marlborough and the Waimate and Oamaru areas.



Exchange Rates

Over the course of the week the NZ Dollar was down against the Trade Weighted Index and it was also down against all our major trading partners, except the Australian Dollar.

 

 

NZ Dollar versus

This Week

(11/7/19)

Last Week (4/7/19)

Last Month (11/6/19)

Last Year (11/7/18)

US Dollar

0.6650

0.6718

0.6584

0.6773

Australian Dollar

0.9554

0.9534

0.9451

0.9136

Euro

0.5905

0.5948

0.5853

0.5802

UK Pound

0.5317

0.5338

0.5199

0.5127

Japanese Yen

71.87

72.38

71.03

74.75

Chinese Renminbi

4.5705

4.6170

4.5475

4.4862

Trade Weighted Index

72.93

73.42

72.44

72.47

Source: Reserve Bank of NZ

 

Wholesale Interest Rates

Over the course of the week the 90 Day Bank Bill rate was down slightly (3 basis points) while the 10 Year Government Bond Rate was up slightly (4 basis points).  The OCR is next reviewed on 7 August.

 

 

This Week

(11/7/19)

Last Week (4/7/19)

Last Month (11/6/19)

Last Year (11/7/18)

OCR

1.50%

1.50%

1.50%

1.75%

90 Day Bank Bill

1.60%

1.63%

1.64%

1.98%

10 Year Government Bond

1.57%

1.53%

1.68%

2.76%

Source: Reserve Bank of NZ