Friday, August 10, 2012

NZ labour market disappoints

The June quarter New Zealand Household Labour Force Survey (HLFS) was disappointing on nearly all fronts.  The unemployment rate rose, employment fell as did the participation rate.  The only bright spot was a shift in composition away from part-time jobs to full-time.

The HLFS was also disappointing in the context of other partial economic data supporting the story of modest economic recovery, especially the more upbeat Quarterly Employment Survey released earlier in the week which had me thinking that, if anything, the HLFS might surprise on the upside rather than the downside.

In terms of the detail employment fell 0.1% over the quarter to be up only 0.6% in the year to June.  That’s down on the 0.9% recorded for the year to March.  The unemployment rate rose from 6.7% in March to 6.8% in June.  Average market expectations were for a 0.4% gain in employment and a drop in the unemployment rate to 6.5%.  To cap off the weakness the participation rate fell from 68.7% to 68.4%. 
On a more positive note, while part-time jobs fell 18,000 over the June quarter, full-time jobs rose 13,000.  This data is not seasonally adjusted so there will be an element of seasonality here.  The good news is that the June quarter recorded the strongest gain in full-time employment since the March quarter of 2010.
The real surprise was the weakness in the Canterbury data.  Admittedly anecdotal evidence suggests that rebuild activity is starting to pick up in Canterbury yet the region recorded a 5.5% decline in employment over the year to June.  That also comes with a 5.1% decline in the working age population in the region which is an indication of the extent of migration out of the region.

The implications of this result for monetary policy are a tad challenging.  In its last set of projections the Reserve Bank of New Zealand (RBNZ) was expecting employment growth of 2.6% in the year to March 2013, with the unemployment rate down to 5.5% by that time.  Both now seem unlikely.  We think employment growth will be around half that level with an unemployment rate around 6.0% by that time.

However, that does not mean there is scope for an interest rate cut.  Wage data is already trending up.  Soft employment and rising wages is consistent with our story of higher structural unemployment and early-cycle capacity constraints emerging.  However, we are not at that point yet.  That has us continuing to believe the next move from the RBNZ is a tightening in monetary conditions, the only question is when.  We are still happy with our view they can wait till June next year.