Wednesday, November 6, 2013

Strong NZ labour market

New Zealand labour market data was unambiguously strong in the September quarter.  Employment expanded 1.2% over the quarter, although we think that in part reflects some catch-up from previous quarterly results that looked too low to us.  Annual employment growth for the year to September now stands at 2.4% which seems about right.

The unemployment rate declined from 6.4% in June to 6.2% in September.  A sharper fall was precluded by a more than decent bounce higher in the participation rate from 68.1 to 68.6 over the quarter.  That in itself is a sign of a labour market in good health.

Wage growth remains subdued.  The private sector ordinary time Labour Cost Index rose 0.4% in the quarter to be up 1.6% for the year.  The annual rate of growth in unit labour costs has been drifting lower over recent quarters, although given how low inflation has been, you could be forgiven for being surprised it hasn’t been lower.  The annual rate of increase in the unadjusted index (nominal wages) rose slightly from 3.0% in June to 3.2% in the year to September.

There is nothing here to spook the Reserve Bank of New Zealand.  Like us they will be seeing much of the strength in the quarterly employment data as catch-up.  That said a strong increase in hours worked over the quarter supports expectations of a strong GDP growth in Q3 (our forecast +1.1% q/q, risk biased to the upside).

The subdued wage picture will continue to lend the Bank comfort with the inflation outlook.  Our expectation is that we are close to the low point in the wage cycle.  Stronger economic growth in the period ahead will be accompanied by relatively strong employment growth which we expect will be sufficient to see wage growth move higher over the course of next year.

While that wage growth will likely remain modest, it at least argues for a shift in monetary conditions towards neutral.  The annual rate of increase in unit labour costs only needs to move from the current rate of 1.6% to 2.0% to be consistent with inflation at the mid-point of the Reserve Bank’s 1-3% inflation target.  We continue to expect the first increase in the Official Cash Rate in March 2014.