The truth about the unemployment statistics, plus a fishing firm closes a Tauranga plant costing 65 jobs

Latest unemployment figures mask reality

While New Zealand’s unemployment rate unexpectedly fell to 4 percent in the second quarter, no one was in any doubt yesterday that the topline number didn’t reflect the bottom-line reality. The true measure of the current state of the labour market was highlighted in the under-utilisation rate (people working fewer hours than they wanted) which rose to its highest level in 16 years.

Officially, unemployment in the June quarter totalled 108,200 people, with an additional 20,200 not working, not looking or unavailable to work due to Covid-19 related issues which would lift the unadjusted extended unemployment rate to 4.6 percent, according to Stats NZ. The extended rate covers both official unemployed and those who did not meet the classification for reasons related to Covid-19.

Stats NZ noted the unemployment rate rose as the quarter progressed reflecting the increasing pressure businesses faced. In the first week of the quarter, data shows the unemployment rate, plus those not unemployed because of Covid-19, was at 2.4 percent. It had jumped to 6.2 percent by week 13.

Labour force participation fell to 69.7 percent versus 70.5 percent in the prior quarter, marking the third-largest quarterly fall since the series began in 1986, while the employment rate fell to 66.9 percent in the June quarter versus 67.5 percent in March. The number of hours worked also posted record declines, with the total number down 10.3 percent since the March quarter and 9.1 percent lower than a year earlier.

Economists are expecting the end of the second Government wage subsidy next month will potentially see a tick up in unemployment in the final quarter.

Sanford to close plant

Sanford has announced its Tauranga fish processing plant is to close with the loss of 65 jobs.

While low processing volumes due to Covid-19 had accelerated the closure, its processing plant also doesn’t meet new seismic strength requirements which had also weighed on the decision to close. Sanford said that until recently, it had been planning a strong future for its Tauranga team, evidenced by the installation of a second processing line just last year. However, the combination of recent engineering reports showing the site needed significant earthquake strengthening and the impacts of Covid-19 had meant the future of the Tauranga plant was no longer viable.

Sandford CEO Volker Kuntzsch said the company intends to continue to unload seafood at the Tauranga site and will retain a number of staff in the region. He also said the company has no plans to close any of its other 11 processing bases. Sanford shares closed down 1.5 percent at $6.35 and have fallen almost 25 percent since the start of the year.

Dairy prices slide in latest GDT auction

Dairy product prices fell sharply in yesterday’s Global Dairy Trade (GDT) auction, with the main price index falling by 5.1 percent as demand from North Asia weakened.

The decline follows a smaller dip of 0.7 percent a fortnight ago, though prices had pushed higher in early July.

The crucial whole milk powder (WMP) index – which impacts Fonterra’s farmgate milk price, fell 7.5 per cent to US$3,003 a tonne – down $215/tonne from the previous auction.

Fonterra’s forecast milk price for the current season is $5.90 to $6.90 per kg of milksolids.

Virgin Atlantic files for bankruptcy protection

Despite a month ago announcing it had secured funding to survive for 18 months, Virgin Atlantic has declared itself bankrupt and is seeking protection from creditors in the US. Virgin Atlantic, which flies only long-haul international routes, had suspended flights in April due to the coronavirus pandemic.

The latest bankruptcy is the second from a Virgin Group airline this year. Virgin Australia was placed in administration in April owing $6.8b to more than 12,000 creditors.

Virgin Atlantic’s filing in the US bankruptcy court said it had negotiated a deal with stakeholders for a consensual recapitalisation aimed at getting debt off its balance sheet and thereby positioning it for sustainable long-term growth. It has also filed proceedings in London, where it obtained approval to convene meetings of affected creditors to vote on the plan on August 25.

It is understood Virgin Atlantic told the High Court it could run out of money in September if a restructuring deal is not approved. In July, the airline said its private deal with stakeholders eliminated the need for support from the British government that billionaire founder Richard Branson had sought. The reorganisation is expected to be completed towards the end of this summer and be spread across the next 18 months.

The airline, 51% owned by Branson’s Virgin Group and 49% by US airline Delta, closed its Gatwick base and cut more than 3,500 jobs to contend with the fallout from the Covid-19 pandemic, which has grounded planes and hammered demand for air travel. The airline said recapitalising the business was the only way it could survive the Covid-19 downturn.

Lockdown not all bad for liquor sales

While the old adage says alcohol consumption usually increases during a recession, global liquor giant Diageo has seen its profit plunge 47 percent to £2.1b in the year to the end of June. The company said most of the damage occurred in the final three months of the year as countries across the world imposed strict lockdown rules, shutting bars and restaurants leading to sharp falls in liquor sales globally.

Diageo said sales slumped 9 percent for the year but plunged 23 percent in the quarter most affected by the closure of the restaurants, clubs, pubs and bars that sell its premium drinks brands including Smirnoff and Johnnie Walker. As a result, the company was forced to write down the value of its brands by £1.3b.

However, it wasn’t all bad news. Diageo said Britons enduring lockdown had proved to be particularly keen on gin and spirits for DIY cocktails, with Google searches for cocktail shakers up more than six-fold. The company also saw a 7.5 percent lift in sales of Baileys after capitalising on the trend for home baking during the lockdown by promoting recipes that use the cream liqueur.

The company said it had been marketing alcohol sales directly to customers in their homes, including through internet retailers such as Amazon. While online sales still only make up a low single-digit percentage of revenues they had doubled in size between the third and fourth quarter of the year as a result of the lockdown.

S&P500 within striking distance of pre-Covid peak

The S&P500 index closed above the 3300 mark yesterday for the first time since markets plunged in March and is now less than 100 points away from taking out its closing high for the year of 3386 on February 19. From the Covid low of 2237 on March 23, when markets had fallen 35 percent, it has taken the index just five months to recover almost all of its losses, despite rising cases of Covid in the US and the greatest contraction of GDP in the June quarter since World War II.

A combination of record low interest rates and seemingly unlimited QE by the US Federal Reserve, record amounts of government stimulus with more to come and record profits for the FAANG stocks which now account for around 20 percent of the index, has the market on course to set a new closing high for 2020 in the coming weeks. Who would have thought that was likely back in March? But don’t bet on it.

Gold closes above US$2000 an ounce

As equity markets continue to push higher, so does the gold price, gaining more than 15 percent in just the past two weeks and pushing decisively through US$2000 an ounce yesterday for the first time.

Gold, traditionally seen as a safe haven, started the year at US$1,500 per ounce but has been rocketing steadily higher in recent months as it benefits from rising tensions between the US and China, increasing concerns about the toll Covid-19 is inflicting on the global economy and the likelihood of more QE by central banks putting further pressure on currencies.

Anxiety over a second wave of Covid-19 cases in the coming months is also pushing some investors towards precious metals while the prospect of political deadlock over the next round of government stimulus in the US, ahead of the November presidential election, has many investors nervous. White House officials have been meeting Congressional leaders for days but are still split over the size of the deal – and how much support should be provided to unemployed Americans.

Andrew Patterson is Newsroom's Markets Editor and has worked for decades as a financial journalist, radio presenter and editor with Australia's ABC, Radio Live and NBR.

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