Molesworth & Featherston (Weekend) – Dec. 6th 2005
Molesworth & Featherston - Weekend Update edition
Business and Political News
December 6, 2005
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Thick and thin
Life is good for households, with continuing income growth and spending. But businesses are concerned about future profits as costs rise faster than prices. Those were the messages from Treasury to ministers in its latest economic update.
With the unemployment rate falling ‘significantly’ even though more people entered the labour force, wage payments grew 7.3 percent over the year to September. Treasury can feel pretty pleased that its picks over the last year accurately tipped the scale of rising household incomes this year (though it was also noting ‘quiet confidence’ among businesses and hinted at a slowing labour market).
There is another blow to claims the economy is sagging, with Treasury noting “there was significantly more retail spending during the September quarter.” It says fatter pay packets explain the greater spend. “Rising prices, especially for oil and its derivatives, explained some of the additional spending, but the volume of goods and services rose too.”
The next full forecast, Treasury’s ‘Half Year Economic and Fiscal Update’ (we liked it better when it was a ‘DEFU’), will be released on Monday, 19 December.
Strong demand - rates up
The Reserve Bank admitted exporters are taking heat from the high dollar and profit margins are falling, but it put up interest rates a quarter of a point on Thursday anyway because
“overall demand continues to outstrip available capacity.”
The Bank says strong demand is being driven by household spending, “linked to a still-buoyant housing market. Increasing government spending and continued strong business investment are also boosting total demand. The resulting excess demand, reflected in a growing current account deficit, is continuing to fuel inflation.”
Inflation has been headed up even if oil is taken out of the picture.
Though the bank thinks house prices will take a hit in the new year, it also says they've held up longer than the bank thought they would. If the Bank doesn't see sign of a slowdown, it will increase interest rates again in the new year. The number of house sales is still high by historical standards, and homes are selling fast.
Treasury warned this month “House price inflation has crept up since the middle of the year and is easily outstripping rents and general consumer price increases. Notwithstanding more household income, the rate of house price increases is now becoming difficult to explain.”
We have argued for at least two years that, with house prices well ahead of rent fundamentals, irrational over-exuberance is the best explanation. But there are rational explanations for some of the rise of housing. For example, houses have always been heavily tax preferred as an investment, but over the last twenty years almost all distortions have been ironed out of the tax system and only housing remains of the major kinks. So it’s no surprise house prices have outperformed other investments over the last decade: It’s irrational not to save by owning houses (especially since political reality ensures there will be no change to the tax status of housing). Concerns over widespread low business confidence might be driving investment out of stocks, as well. When every business commentator is saying things are tough, it might not seem rational to put money into domestic equities.
ALSO IN THE WEEKEND UPDATE…
NOT GLOBAL ENOUGH
A new report from the New Zealand Institute reaffirms we haven’t been doing well enough at joining global value chains. Page 1.
ROLLING AVERAGE POLL OF POLLS
it would be a clear Labour- Green government in a 121-seat parliament if an election result now produced the result opinion polls are finding. Page 3.
We know you’re scrolling to the juicy bits first...political reporters on the move and a bunch more stuff. Oh, and the press gallery party is next week. In case you missed it, we’re buying a few drinks for some of our contributors, readers and even the people we write about.
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