This is the final part of the detailed review by ANZ NZ's economics team of six key themes for 2013. The first one is here », the second one here », the third one is here », the fourth one is here », and the fifth one is here »
By Cameron Bagrie*
Our key aim in writing this article is to alert our readers to some of the wider economic forces at work.
We want to highlight the inherent tensions that exist within the economic system, and to encourage readers to start thinking about the implications for their own businesses.
Ultimately, it is the average rate of growth over a number of years (and volatility around that growth) that matters, as opposed to what GDP growth will be in any single year.
The repercussions of the global financial crisis will continue to be felt for years.
Therefore, we would encourage our readers to think about the macro themes we outline below within a five-year time horizon.
THEME 5: All about jobs
The labour market is the key macro variable to watch in 2013. In the US (and NZ), jobs have been the key missing ingredient in the tepid recovery thus far.
Low global interest rates for an extended period in response to soggy labour market conditions will be one factor keeping the NZD elevated vis-à-vis peers.
We expect a gradual and slow improvement in New Zealand’s job scene over 2013, with it front and centre as an issue in the political arena. The influence of a polarised compass and signs of diminished job matching efficiency will be reflected in greater dispersion across labour market statistics.
We’re looking for constructive policy initiatives to help ease such frictions. We’ll see some, though expect them to fall short of being the step-change variety.
Why is the labour market key to watch in 2013?
- Internationally, it will have a huge bearing on when the US Federal Reserve starts to unwind its extraordinary policy stimulus, a precursor to the NZD/USD correcting to more New Zealand friendly levels.
- There is a huge social cost from structural shifts upward in unemployment.
- Trans-Tasman relative employment prospects are a huge driver of migration flows.
- Recent fillips in the property market will not be sustained without a commensurate labour market improvement.
- Spare capacity across the labour market is a key influence on wage growth, core inflation and the outlook for the OCR.
- We’re in the middle year of the election cycle: voters need to see payback following some tough years if a new broom is to be avoided. Employment will be a hot political issue in 2013.
- Structural changes in the demand side of the economy as rebalancing continues and a different mix to growth unfolds will ultimately need to be matched by shifts in supply-side capacity. The education sector and migration flows (both nationally and between regions) are key.
- Productivity. Our nationwide labour productivity performance has been poor in relation to OECD peers.
- Hysteresis effects. Labour market outcomes tend to be persistent, notwithstanding the volatility of some quarterly surveys. Turning around ingrained trends and practices will not happen overnight. Once out of work it can get progressively harder to reintegrate back into the workforce.
The labour market remains fragmented. The unemployment rate rose from 6.4 to 7.3 percent over the first nine months of 2012.
A quick look “under the bonnet” suggests conditions are a bit better than the unemployment rate is showing. The past year has seen a decrease of nearly 6,000 people on the unemployment benefit, which suggests the official unemployment rate figures could be overstating the reality and understating employment growth, though falls in beneficiary figures are also likely to reflect tough eligibility criteria.
The unemployment rate for those aged 30 and above is around 4.8 percent, which is not far off “full employment”, though a far cry from what we were seeing during the housing boom times, when the likes of the 40+ group had an unemployment rate of 2 percent!
However, the unemployment rates for those aged 15-19, 20-24 and 25-29 are 26.6 percent, 13.2 percent and 7.9 percent respectively (note: all figures are seasonally-adjusted estimates).
Unemployment rate figures for young age cohorts have risen more sharply than those for older age groups, and are well north of their historical averages. Such figures are social and economic timebombs if not addressed.
Employment indicators are equally mixed. Job ads – a timely barometer – have been moving sideways for an extended period and the level remains low, the exception being Christchurch, which has shown a strong lift. Employment intentions have been positive for some time, though we note that business sentiment measures for activity, employment and investment have been disconnected with actual outcomes for a while. Firms are noting skill shortages in some areas.
History has shown the unemployment rate can come rocketing down when the right economic climate appears. Between 1991 and 1995 the unemployment rate dropped from 11 percent to just over 6 percent. It was below 4 percent for much of the 2005/07 period.
When you look for a catalyst for this to reoccur it’s hard to go past Christchurch, with around a 75 percent lift in newspaper and internet job advertising compared to the months prior to the February 2011 quake.
However, right here and now we also know that:
- There is spare capacity in the labour market. Commentary typically focuses on the unemployment rate. Yet when you look at measures such as hours per employee sitting around record lows, or measures of underemployment (those that would like to work more hours), it is clear that considerable slack remains.
When labour demand starts to recover, there is ample scope to increase the hours of the existing workforce to meet that demand without needing to take on new staff. The end result: a jobless recovery.
- It’s taking time for resources such as labour to respond to market signals and structural shifts across the economy.
New Zealand is still by-and-large churning out the same student mix we did four years ago, yet that economic model is now broken. This is not where the sustainable job growth is. Little wonder graduates are frustrated and increasingly looking overseas.
In the meantime, facing mixed economic signals businesses battle on, seeking what limited growth they can eke out, and increasingly attention returns to costs. In a different demand/growth environment, the cost line equally gets tweaked. For a host of industries, the regularity by which costs lines are being examined is becoming the “Groundhog Day” of yearly nightmares. And for some pockets, it has really only just begun.
- The labour market is becoming increasingly polarised between the skilled and unskilled. These kinds of frictions are an inevitable byproduct of the kind of rebalancing of growth that New Zealand requires. The economy faces a challenging period, rebalancing from spending to earning at the same time it rebuilds a city.
The construction sector is where the most obvious tensions will play out. The sector has lost staff and expertise to Australia in recent years, and while there are signs that industry training is likely to step up, it will not immediately address capacity constraints in the sector. Greater dispersion in wage settlements is becoming apparent.
- The labour market is not perfectly mobile. So while jobs growth may be pending in the South Island and Christchurch in particular, physically relocating resources imposes challenges. People like to be near family and whanau. Kids are in schools. Relocation in two-income households is more difficult and faces a higher hurdle, given the potential loss of a second income. If you are considering shifting, better opportunities (and weather) may also be on offer across the Tasman.
- There are some signs of diminished matching efficiency (i.e. the ratio of vacancies to the unemployed) across the labour market.
Traditional tight relationships between the unemployment rate and skills shortages have gone awry. Recent work by the RBNZ ('Matching workers with jobs: how well is the New Zealand labour market doing', December 2012 RBNZ Bulletin) points to a decline in matching efficiency considering the Beveridge curve (the relationship between vacancies and unemployment) and an estimated proxy measure of matching effectiveness.
So, we have a situation heavy in fragmentation and tension.
Internationally, a surfeit of labour resources in the US looks set to keep the US Federal Reserve on hold until the unemployment rate gets to 6.5 percent. Europe has got a structural unemployment problem on top of a cyclical one and can’t address the latter, let alone the former.
The Australian “jobs machine” has done a Lange and stopped for a cup-oftea, with job ads down 16 percent on a year ago.
The bottom line in all of this is that other central banks will keep interest rates low and this means the NZD will remain high.
Suddenly the incentives to emigrate don’t look so great, and in the case of trans-Tasman flows, we’re likely to see more people returning, and no doubt they’ll flock to Auckland, exacerbating housing issues.
Elections are coming
Looking forward, the election cycle will demand that employment receives top billing as a local issue. Elections are won or lost on unemployment tilts, particularly once the electorate moves past the honeymoon stage associated with the first political term.
So the incentives are with the incumbents to act. Christchurch’s rebuild represents a prime opportunity to trial a working for the unemployment benefit scheme. The argument against such ideas is that they can displace real jobs. This won’t happen in Christchurch such is the demand! The plethora of tertiary training institutes should be consolidated and institutions made to specialise more. Student fee structures should ideally be more aligned to resource pressures and skill mismatches. Of course, none of these ideas will make the cut when the announcements come. We’ll see some tinkering and not much more.
We expect the unemployment rate to end 2013 with a 6 percent handle in front of it as opposed to a 7.
While employment indicators from confidence surveys are reasonable, job advertisements have been flat-lining which means the job vacancy rate has been rising. Firms remain cautious pulling the hiring trigger.
However, a key assumption we are making is that more consistency on the GDP front (eking out something marginally above two percent - a rough breakeven rate for unemployment to go up or down), delivers modest employment growth over the year. We’ll take it, but it’ll hardly be an environment where job security is strong.
Better job prospects will be welcome, though the pace of improvement, uncertainty and fragmentation is expected to keep households cautious and focused on improving their precautionary saving buffer.
Outcomes across the labour market will be more divergent than convergent. This is already occurring across wage inflation measures such as the labour cost index. We’ll see more.
In a typical economic expansion, dictated by cyclical dynamics, the fortunes of all tend to be heavily intertwined. A rising tide lifts all boats. However, when you are buffeted by both structural and cyclical forces, outcomes become more divergent.
Skills shortages emerge more quickly in sectors that have been under-invested in. Conversely, sectors (and employees in them) which have excess supply-side capacity and are facing structural headwinds such as deleveraging, tend to suffer (and yes, banking is one of these).
*This report was written by the ANZ New Zealand economics team which consists of chief economist Cameron Bagrie, head of global markets research David Croy, senior economists Sharon Zollner and Mark Smith, economist Steve Edwards, strategist Carrick Lucas, and rural economist Con Williams. It is used with permission. This was the final part.