This week's labour market figures seem set to be 'noisy' due to Covid disruptions, but should show falling unemployment and rising wage levels

Well, they will be 'noisy', as the economists like to put it.

That's labour market figures I am talking about. The Covid disruptions since August will have an impact on how this week's (Wednesday, November 3) labour market figures for the September quarter to be released by Statistics New Zealand will look.

The lockdown has, of course, disrupted how Stats NZ is able to collect its data. So, there will be 'noise'.

In general terms though, the figures are expected to reflect the very heated conditions in the labour market prior to the outbreak of Delta.

Unemployment, which surprised very strongly, by plummeting to just 4% as of the end of June, is expected to fall again. The Reserve Bank in its August Monetary Policy Statement picked 3.9%. Some economists think it will be a little lower, at 3.8%.

Wages are likely to be of greater interest. With the pricing pressures that are being seen, combined with an increasingly constrained supply of labour, there's plenty of anecdotal evidence of higher wages being demanded.

The RBNZ predicted that private sector wages would lift 0.6% to 2.4%.

Economists are expecting the figures to be somewhat higher than that. And any sign that wage pressures are really starting to take off will put further pressure on the RBNZ to keep hiking interest rates.

The RBNZ increased the Official Cash Rate from 0.25% to 0.5% in its review last month and is largely expected to increase the rate again to 0.75% on November 24.

Banks are already front-running official interest rate rises with mortgage hikes as they face extremely volatile (and upward) pressures in the wholesale interest rate markets.

ANZ economist Finn Robinson and chief economist Sharon Zollner say it’s quite easy to envisage a scenario where the labour market data are so strong that the urgency for monetary policy tightening "is ratcheted up yet another notch".

"For example, we could see the unemployment rate drop into the low 3s, even with rising participation over the quarter. If the details are that strong (ie the super-low unemployment isn’t due to falling participation, which would be a weak or just noisy signal), the risks of a wage-price spiral would be front and centre for the RBNZ.

"In that instance, market odds on a 50bp hike in November (currently 25%) would likely rise. While we wouldn’t rule it out, at a time of such extreme Covid-related near-term uncertainty that would be very bold, and not consistent with the kōtuku speech about treading cautiously at such times."

The ANZ economists suggest there would be "gentler ways" of delivering more monetary policy tightening that preserve more optionality should downside risks materialise.

"One of these options could be simply forecasting a higher terminal OCR in the November MPS. That would be credible, and cause swap rates to rise further, taking mortgage rates with them.

"Alternatively, or in addition, the RBNZ could consider adding in a Monetary Policy Review in January, filling in what’s always been an odd gap in the monetary policy calendar.

"One of the strongest arguments for a 50bp hike is that it’s a very long time until the February Monetary Policy Statement. So why not just fix that? It is not unheard of for the RBNZ to adjust its meeting dates – last year the RBNZ MPC met for at least two unscheduled meetings, and the March meeting was cancelled. Of course, we’re not in the thick of a crisis, but things are very uncertain, and by January, we’ll have a better steer on how reopening from Covid was going. It seems like a win-win to us."

Robinson and Zollner say "to be clear", their central view is that the labour market data will NOT force the RBNZ’s hand to hike 50bps or consider the alternative strategies mentioned above.

"A noisy outturn that raises as many questions as it answers seems most likely. But given how much uncertainty there is right now, we can’t rule out a very strong release, and it is worth highlighting the potential paths the RBNZ could take in that instance."

The ANZ economists' official pick is that the unemployment rate fell to 3.8% in Q3 (4.0% previous) due to strong employment in the first part of the quarter.

"Lockdowns will add noise, but looking ahead to 2022, we expect the unemployment rate to continue falling, bottoming out at 3.5%."

Wage inflation is likely to "come in strong".

"We think private sector labour costs were up 2.7% y/y, and that hourly earnings rose 4.3% y/y in Q3. Those increases aren’t keeping up with inflation – we expect wage inflation will increase significantly over the next year, reflecting the cost of living and further labour market tightening."

Westpac acting chief economist Michael Gordon also expects the unemployment rate to fell to 3.8% for the September quarter. 

He's picking 1% private sector wage growth in the quarter, for an annual rate of 2.8%.

"There is substantial evidence that the demand for workers is running hot, relative to supply. As a result, we expect to see a further acceleration in wage growth.

"The tight labour market presents a major challenge for the Reserve Bank. In these conditions, even a temporary inflation shock can provide the spark for an ongoing series of wage and price increases," Gordon says.

He says, "crucially" both the unemployment and wage figures are expected to be stronger than the RBNZ assumed in its most recent forecasts in August.

"If we’re right, that would further bolster the case for a series of OCR hikes over the coming months.

"On that point, we should address the fact that interest rate markets have been on an absolute tear in recent days – market pricing is now consistent with an OCR reaching almost 3% in the next two years.

"It’s likely that some of this reflects runaway momentum in a thin market, rather than a strongly-held view on the cash rate. So while we wouldn’t rule out such an outcome, we’d note that there’s already a lot of inflation ‘fear’ baked into the longer-term interest rates that borrowers face."

ASB senior economist Jane Turner says the September quarter labour market figures will be mixed, but for the most part the outcomes will reflect how well the labour market was doing ahead of the community outbreak of Covid-19 in August.

She's picking an unemployment rate of 3.9%, with private sector wage growth of 0.8% in the quarter and 2.8% for the year.

"Ahead of the first [Covid] case being discovered, the NZ economy was exceptionally strong and the labour market was rapidly overheating. Demand for labour far outstripped supply, with the latter constrained by international border closures. Employment was strong, and the conditions were ripe for strong increases in wages.

"Measurement challenges due to lockdown will impact our ability to interpret the impact of Alert Level 4 restrictions on employment. The HLFS [Household Labour Force] survey saw a fall in its response rate, which impacts its reliability. Meanwhile, the QES [Quarterly Employment Survey] largely covers the period prior to the discovery of Covid-19 in the NZ community.

"Even if the labour market softens over the second half of 2021, it will most likely bring the balance of labour market conditions from ‘extremely tight’, to ‘still somewhat tight’."

Turner expect labour market measures will be largely consistent with being at or close to maximum sustainable employment by early to mid-2022.

"However, the upward pressure on wage inflation will remain and the RBNZ’s inflation mandate will stay under threat, and we expect the RBNZ will continue to lift the Official Cash Rate over the coming year."