Wednesday, August 6, 2014

NZ labour market...and dairy prices

June quarter New Zealand labour market data was weaker AND stronger than expected: weaker due to lower than expected employment growth but stronger with a bigger than expected fall in the unemployment rate.  Wage growth also came in a tad stronger than expected.

Employment growth came in at 0.4% for the quarter, lower than our expected 0.6%.  That result for the quarter put the annual rate of growth at 3.7% for the year – still a pretty good result.  The unemployment rate fell to 5.6% over the quarter, lower than our forecast of 5.8% and down from the revised March level of 5.9%.  The bigger than expected decline in the unemployment rate was courtesy of a fall in the participation rate.

Wage growth came in a tad stronger than expected but after allowing for the recent increase in the minimum wage didn’t signal any meaningful increase in wage inflation.

By itself this data suggests a prudent course for monetary policy would be for interest rates to push on towards neutral.  But that would mean ignoring another large fall in dairy prices overnight.  Prices fell another 8.5% in the latest auction, taking the cumulative fall since February to 41%.  While the NZD has moved lower, it has still not adjusted sufficiently given the fall in commodity prices.

We had expected dairy prices to be weaker this year.  This has been a factor in our view that we have already passed the peak in quarterly GDP growth rates.   But dairy prices have ended up being considerably weaker than we expected which has shifted the risk to our growth forecasts to the downside.  At the very least this justifies the RBNZ's signaling of a cup of tea to assess where to from here.  More on the growth and interest rate outlook soon.