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Molesworth & Featherston - 7 October 2003

Molesworth & Featherston

Business And Political News
Weekly Bulletin
7 October 2003


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Don't worry, be happy.

After being burned over its outlook for the June quarter, when it picked GDP growth above 0.3 per cent and wore 0.2 per cent, Treasury is picking a strong rebound in the three months to September.

In its monthly report to finance ministers Treasury was more optimistic about the export outlook and the impact of the external sector than they had been recently, although the domestic economy (rising house prices, strong retailing, business and consumer confidence) remained the main driver. External shocks remained the main downside risk. Meat slaughtering was up 12.8 per cent in July, electricity generation has sparked after the power crisis, and visitor numbers have remained strong into September. Migrant flows (i.e. long term arrivals) are still strong with arrivals exceeding departures by 41,000 in the year to August, although the trend is for a slowing from the peak in the first half of the year.

Treasury spent a lot of time in its latest briefing outlining the trade situation and the current account deficit, which has surged from 2.6 per cent of GDP a year ago to 4.6 per cent in June and is heading higher. Five per cent is supposed to be the international alarm level when your currency starts falling out of bed and you face higher and more difficult credit terms. However we sailed well past six per cent in the mid 1990s and suffered very little so maybe we can do it again.

Growth among our 14 biggest trading partners has been revised up by 0.2 of a percent in this year and 2004 and now sits at 2.6 per cent and 3.6 per cent respectively. The IMF's world outlook for 2003 is for 3.2 per cent rising to 4 per cent in 2004.

Who wants to debate fiscal policy?

We can't understand why there isn't more debate about how the fiscal surpluses - at $5.6 billion for the year to June 2003 - is either spent or handed back in tax cuts.

Maybe no one has an incentive to stimulate a debate on the issue:

- Labour wants to hold off on the issue until it announces its plans in a budget "big bang' close to the 2005 election.

- The National Party doesn't want to get into the issue because it hasn't decided its preferred tax spending mix yet - and it is still completing policy work.

- The only other party with a sustained interest in fiscal policy is Act, which has predictably argued for the fiscal surpluses to be returned as tax cuts.

The political problem with holding off debate is that the longer the government waits before spending the surplus, the more likely it is that the economy will be in a strong upturn. Then increased spending - or tax cuts - would be pro-cyclical, giving the Reserve Bank the excuse to remove some of the hip-pocket effects by increasing interest rates.

Molesworth & Featherston seeks your suggestions for why more people haven't been thinking up ways to spend the money.

Cabinet this week

Cabinet had a brief agenda on Monday, although it spent time planning for the last 11 week run up to Christmas, which should see Parliament rise in the week of December 15.

Cabinet's Appointments and Honours Committee met late into the night on Monday putting together the next New Year's Honours list. Unfortunately, since knighthoods were scrapped, the fun has gone out of honours.

New laws coming your way soon

Between now and Christmas the new Land Transport Management Bill will be dealt with. (It will be accompanied by a review of major projects under the deal with Greens).

The new dog control law will come out of select committee soon and the Government hopes to pass that before the House rises for summer.

The Holidays Act revamp will come out of select committee and will be passed by Christmas, making way for the committee to consider amendments to the Employment Relations Act being drafted now under instruction from Labour Minister Margaret Wilson.

The Smokefree Bill will be up again next week, no doubt accompanied by more filibustering by Peter Dunne and his party.

New laws for introduction over the next two months include the Electricity Commission legislation (soon), the Maori Fisheries Allocation law (in November) and the Waitaki River resource consents law.

There is still some work to be done on new rules covering projects of major national significance, which would be fast tracked through the Resource Management Act and the Environment Court. They are yet to make it to the full Cabinet but they might still see the light of day before Christmas.

This week in the House

The New Organisms and Other Matters Bill, putting in place arrangements for lifting the GM moratorium - and the conditions for release -- will continue its committee stages this week, accompanied by a range of protests by the naked and the semi-dressed.

We see the third reading of the Credit Contracts and Consumer Finance Bill in Judith Tizard's name followed by the second reading of the Supreme Court Bill and its committee stages on Wednesday - that's the Bill which signals the end of legal appeals to the Privy Council.

This week outside the House

Today there will be an announcement of a hospitality industry partnership flowing out of Steve Maharey's Jobs Jolt package.

Wednesday will see the annual report on the student loans scheme tabled, which has what the PM calls "an encouraging trend'. That is rumoured to show a levelling off in the debt burden for students. Retail trade figures for August will be released.

On Thursday the Auckland mayoral forum will meet PM Clark and other ministers at the Beehive. Also on Thursday research in the early childhood education area will be released, along with June quarter work stoppages figures.

Party party party.

The party conference season is in full swing. The People's Republic of Christchurch is the venue of choice for NZ First this weekend, United Future for one day on November 1 (giving them very little time to realise they are on the wrong side of the political fence in supporting Labour) and the Labour Party will confer there on the weekend starting November 7.

The final three

The next chief executive of Radio New Zealand will come from a shortlist of former INL executive Rick Neville, former political editor Al Morrison, or RNZ's technical operations boss Matt Finn, the only current insider left in the running. The hot money remains on Neville.

The global economy

After showing signs of recovery - at long last - with six consecutive months of rises, global shares took another slump in September.

Heavyweight credit ratings agency Standard & Poor's points out that the third quarter is historically the weakest for stocks. Despite the solid run, S&P's global 500 index (of really really big companies) lost 1.2 percent - that's the average loss in Septembers since 1928. S&P point out that since 1950 the average September loss for its 500-index has been 0.7% -- but it's been a beast for the last four years averaging losses of 6.4 percent, making this year not so bad by comparison.

For the future, S&P is tipping global stocks to continue to recover - but quoting Mark Twain: "October: This is one of the peculiarly dangerous months to speculate in stocks in. The others are July, January, September, April, November, May, March, June, December, August, and February.'

Infrastructure snippets

Crown to buy back railway-station

No jokes about the fat controller. The government is buying Wellington Railway Station from Tranz Rail for $11 million (including GST and a component which is being described as a payment to Tranz Rail to move out while renovations take place). Another $14.5 million is being paid for upgrades and maintenance, $25 million all together.

The funds will come from money set aside when the government announced earlier this year its purchase of trace infrastructure.

More seats in the Singapore sky

Even more competition is on the way for would-be alliance partners Air New Zealand and Qantas. Singapore Airlines is adding extra flights and introducing larger aircraft on New Zealand and Australian routes.

Singapore Airlines is recovering from its first ever loss this year, suffered when the SARs virus wiped out Asian tourism. If they can make the route pay.

In other email

- Molesworth & Featherston occasionally reviews content in other email newsletters.

It's sometimes said that an economist who makes predictions is an economist who is preparing an explanation for why the facts don't fit the model.

Leading economic consultancy NZIER bravely publishes quarterly predictions.

In September 2002 (halfway through the previous financial year) it forecast GDP growth for 2002-03 of 2.9 percent. In fact, for the year ended June 2003, the economy grew 4.0 percent.

NZIER's analysis: "In coming quarters, the impact of falling export revenue will be felt on domestic demand. Employment growth will ease and wages will grow more slowly. However, softness in consumption growth will largely be offset by a lift in the value of exports as global growth accelerates. The strength in the Australian housing market will boost manufactured exports, and tourism will pick up as incomes increase overseas."

The astrological echoes challenge your reviewer. Was NZIER forecasting "falling export revenue' or "a lift in the value of exports' along with a "boost [in] manufactured exports'?

What actually happened? Falling export revenue did soften domestic demand, but a robust domestic economy (entirely missed by the forecast) meant employment growth remained strong (unemployment continued to fall) and real wages continued to grow. Tourism suffered an unexpected blow from SARs (which could not have been predicted) but displayed resilience.

This September, NZIER is forecasting "growth will moderate to 2.2% and 2.0% in the years to March 2004 and March 2005 respectively.'

Quote of the week

"The PM is being a very cheeky Clarky."

- Ngai Tahu's Tahu Potiki discussing the foreshore and seabed issue at an Act Party seminar, as quoted by Act "The Letter'.

Fine print

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