Wednesday, May 7, 2014

The NZ labour market, the NZD and the RBNZ

New Zealand March quarter jobs growth came in at +0.9% for the quarter, stronger than the market consensus pick of +0.6%.   The annual rate of growth was a spectacular +3.7% for the year to March.  The strong jobs number supports our expectations of strong GDP growth in the period ahead and a broadening out of that growth across the economy.

Despite the strength of the jobs growth the unemployment rate remained unchanged 6.0% compared with market expectations of dip lower 5.8%.  That’s thanks to the 0.4pp increase in the participation rate.  We knew growth in the working age population would be strong over the quarter on the back of solid increases in net migration, but growth in the labour force exceeded even that. People starting to look for work is itself a sign of confidence in the jobs market.  That’s a good thing.

An unemployment rate of 6.0% suggests there is still plenty of slack in the labour market.  Indeed wage growth came in below expectations at +0.3% for the quarter according to the Labour Cost Index (private sector, all salary and wage rates), with the annual rate at 1.7%. 

Looking ahead we expect the pace of jobs growth to slow in the months ahead.  We have now had three quarters of employment growth of around 1% per quarter.  Unless productivity growth is zero (which we expect it’s not) it seems reasonable to expect some moderation.  However, we still think that growth will be strong enough to continue the trend decline in the unemployment rate which we still think will be closer to 5% by the end of the year.

So what does this mean for the Reserve Bank and monetary policy?  It’s all quite fascinating.  The employment growth numbers will give the RBNZ confidence that the economy is powering ahead.  That will in turn give them confidence that it is correct to be raising interest rates “towards a level at which they are no longer adding to demand” (from the April OCR Review press release).

But we also know the exchange rate is a complicating and frustrating factor in wanting to get interest rates higher.  That was made loud and clear again in a speech by Graeme Wheeler at a dairy industry function this morning in which he repeated the RBNZ’s view that the exchange rate is overvalued and unsustainable.  He went on to say that if the NZD were to remain high in the face of weakening fundamentals (i.e. declining export prices), it would become more “opportune” for the RBNZ to intervene in the currency market.

However to intervene in the currency and continue to raise interest rates would be inconsistent.  Such intervention would therefore require a pause in the interest rate hiking cycle.  In the meantime I’m still expecting 25bp hikes in June, September and December for an OCR of 3.75% by the end of the year, but much will depend on the trajectory of the exchange rate.  Watch this space.