The labour market has been a wonderfully contradictory thing - its sheer strength has been both a good news and bad news story for the New Zealand economy.
The fact that our economy has been roaring along with what is essentially 'full' employment has helped the NZ public get through the trials and tribulations of the Covid pandemic in pretty good shape. That's great news.
Increasingly, however, as businesses have struggled to fill jobs it has meant capacity problems, which have helped to fire up inflation. Bad news.
Lest we forget, annual inflation as of the September quarter came in at a bumper 7.2%, down only marginally from 7.3%. However, domestically generated inflation in our capacity-constrained economy actually increased to 6.6% from 6.3%, which was a lot higher than anybody forecast, including the Reserve Bank (RBNZ).
The RBNZ would like inflation to get back into its 1% to 3% box. Inflation is not being co-operative. So, the RBNZ's been getting increasingly bold with its attempts to throttle the life out of inflation and has, thus far raised the Official Cash Rate by a thumping 275 basis points in 2022 - easily a record for a calendar year, and with more to come.
At the moment the OCR stands at 3.5% with the next review due on November 23. After the much-too-hot inflation figures came out, the market focus switched to expecting a 75 basis-point rise next time around, which would see the OCR end the year on 4.25% and with the next review not till towards the end of February 2023.
The interest rate rises are definitely starting to have an impact, but arguably not as much impact yet as the RBNZ would want. And the labour market's a big part of that.
As per the June quarter labour market figures released by Stats NZ, our unemployment rate was just 3.3%, while average hourly private sector wages had increased 7% in the year to June.
So, inflation's been roaring, but the fact that jobs have been readily available has meant people can move to higher paid jobs - or indeed get pay rises in their existing jobs that just about keep up with inflation.
This has all come at a time of course when the borders have been closed so businesses have not had the usual access to workers from offshore. And while the border is open again now it doesn't look we will see the sorts of influxes of labour we've had in the recent past for a while at least anyway.
If this super-tight labour market situation continues then the RBNZ's efforts to get inflation back under control will be hampered, since people will be able to compensate themselves for the higher amounts they are having to spend with higher incomes. It's the classic wage-price-spiral and it's looking well under way at the moment.
What the RBNZ needs very much then is for some 'spare capacity' to start developing in the labour market. It needs the unemployment number to rise. That will theoretically come about as the higher interest rates the RBNZ is causing start dampening spending in the economy. But while there's some signs of that its very clear that a lot of households have come through the pandemic in strong financial shape. Money is still being spent.
As for the suite of labour market figures that Stats NZ will be releasing on Wednesday, November 2, the RBNZ's not expecting a particularly favourable turn of events.
It is forecasting that the unemployment rate will remain at 3.3%. If the rate does, it will be exactly the same as it was a year ago (in September 2021). That means we will have had 12 months where the unemployment rate has hovered between 3.2% and 3.3%. Super low.
Where would the RBNZ like the unemployment rate to be? Well, it's estimated that the RBNZ currently sees unemployment of about 4.5% as being the point at which the figure turns from inflationary to disinflationary.
The RBNZ is forecasting that unemployment will start to rise in the current December quarter (to 3.5%) and will hit 4.4% in 12 months time, IE for September quarter 2023.
And wages? Stats NZ furnishes a number of measures in its data. For simplicity's sake I prefer to go by the private sector average hourly rate. As stated further up the article, that rose to 7% in June up from 5.3% as of the March quarter. The RBNZ's got a bit of leeway here in terms of its expectations. It is expecting very strong wage pressures in the immediate future.
In fact the RBNZ is forecasting 8.3% hourly wage growth as of September - and it is only forecasting the wage growth rate to get back to 7% by the end of next year.
Where does this all leave us then when the figures come out on November 2?
The area most likely to surprise could be the unemployment rate. Economists have previously suggested that 3.2%-3.3% might actually be a kind of lower bound for the rate and that we've simply not been able to fill enough new jobs to get the figure lower.
Notwithstanding that though, there's been bits and pieces of data around that point to there possibly being a further reduction in the unemployment figure this time around, maybe to 3.2% again, or even 3.1%. How patient will the RBNZ be if that's the case?
As stated above, with the RBNZ picking 8.3% hourly wage growth, an upside surprise for the central bank in this statistic appears unlikely. But what if?
If we were somehow to see a figure in excess of 8.3%, combined with a lower unemployment figure, it would be yet another nasty shock for the RBNZ.
The labour market figures are the most significant remaining piece of economic data ahead of the November 23 OCR review. We know the inflation figures were a most unpleasant surprise - remembering that the RBNZ had expected the figure to drop to 6.4%. Big miss.
So, any further unpleasant surprises - and a lower than expected unemployment figure coupled with higher than expected wage rises would be that - and there would immediately be speculation as to what the RBNZ might do in that final OCR review for the year.
The markets and economists are fairly solidly aligned in expectation of a 75 point rise to 4.25%. But under Governor Adrian Orr the RBNZ has shown a penchant for trying to off-balance the markets. And if the labour market figures are stubbornly strong, there might be a temptation to give everything a sharp kick as we head into summer. That's why personally I'm not yet ruling out the possibility of a jumbo-sized 100 point lift to the OCR.
Much depends on the final shape of the labour market figures. 'Good' news for the workers with a falling unemployment rate and strong wages lift would be not be good news for the RBNZ.
It actually needs the economy to deliver it some 'bad' news (IE rising unemployment, not-to-high wage rises) to show that all that interest rate hiking is working.
If the RBNZ doesn't get such news then it might have a pretty uneasy summer.
*This article was first published in our email for paying subscribers early on Friday morning. See here for more details and how to subscribe.
104 Comments
Yeah but have you noticed how so far all these rises aren't doing anything to the cost of goods?
It can be whatever it wants but inflation isn't going anywhere quickly. The RBNZ will need a few 10s of thousands of extra unemployed first and it's unlikely we'll see meaningful layoffs till around Xmas.
We dont want layoffs prior to Christmas , that's not in the spirit of the season ... and next year there's an election ... don't wanna scupper Jacinda's chance for a big win there ... she's just 1 from 4 so far , let's pump that to 2 from 5 , huh ...
... 2024 good for some meaningful layoffs & inflation busting ?
... exactly ! ... he tinkered around with a series of tiny 50 point moves ... when we all knew he needed it far far higher , and quicker ... shock & awe , 100 pointers .... we should have the OCR at 5 % now ... if not , even higher ...
I'm hoping he gets a 12 month extension to his contract , so that the Gnats can replace him with someone competent after they take power next year ...
Cinnamon scroll please.
Am just curious what thoughts and feelings, good and bad, this nz herald story creates. It is perhaps part of the 'bad news' the rbnz needs
Mum hit by big Auckland rates bill now worries she could lose her home
https://www.nzherald.co.nz/nz/mum-hit-by-big-auckland-rates-bill-now-wo…
"Bruce Patten - a mortgage broker with Loan Market - said the latest predictions are for major bank interest rates to potentially climb to 6.5 per cent or even knock on the door of 7 per cent.
That could equate to the typical homeowner in Auckland paying $26,000 more per year on their mortgage or $500 per week, Patten said."
The Prophet did his best to warn the people of 7% Interest Rates This Year, Guaranteed.
Those that did not heed the warnings are now in Trouble. Here is a warning for next year.
10% Interest Rates Next Year, Guaranteed !
There are a number of simple folk around that do not demonstrate the mental capacity to properly interpret what the scrolls teach.
The message is very clear. We can only exercise patience and do our best to save more of these people from their own lack of intellectual fortitude.
The prophet wept when he saw full grown adults clamouring to pay seven figure sums for a cardboard box in Papatoetoe.
He weeps even now as he sees battery cage townhouses sold to the gullible for four times their true value.
He is now with us in grief as people suffer financial ruin and humiliation for not paying heed to the great wisdom and common sense that were provided by the scrolls.
I liken those that laugh at the scrolls teachings to those that rush to the beach to marvel at the outgoing tide after an earthquake. When it all goes belly up they become activists to a lost cause. They then demand a bailout from the fallout of foolish decisions they lack the courage to own.
Fundamentally her problem is she's the sole earner and her job has a fairly low income ceiling, and that ceiling is dictated by the state. She's gone interest only to tide herself over and things haven't improved.
Do we know how many people opted for covid-related mortgage relief?
How can the bank lend her $5k
She can’t repay the principal so she’s effectively insolvent
Absolute carnage in the housing market as it returns to fundamentals is my best guess
She will be lucky if she can afford a ticket out of here
Why shouldnt the bank force her to sell whilst she can albeit slowly
I would expect there are hundreds of thousands who don’t know how they will service their loans next year and the year after.
All the new landlords who were topping up a few hundred a week to be on the ladder….. now looking at finding 25k a year.
What a bloody mess
OCR is way behind and is in fact so slow to rise even increases in your pay have been able to keep up. It needed a sudden massive jump and it did not happen so it will drag on for another year. Expect another 0.5% in November as promised but Feb next year could be more interesting.
This reminds me of the plight of African wildlife in a large and protected park in Kenya… long running drought has the herbivores starving to death while the carnivores have never had it better (they have option value, but timing of the event to realise the value is uncertain and they too risk extinction)
Dunno - govt is going to be broke and will need to grab $ whereever they can. Wage earners tapped out so income tax and GST are hard to raise much. That leaves capital gains. But Monetary Policy has weakened the economy so much the funamentals have finally started drying up the realised gains. So no good options - more borrowing (of course) and taxing unrealised capital gains?
The rbnz exec team will still be working, probably remotely like on a beach somewhere. There is lots they can do such as monitoring consumer and investor confidence. And for that they lurk around the pages of interest.co. I wonder if any signed up as a commenter, Adrian Orr plays devils advocate as....
I think we are passed the point of a safe and orderly return to sustainable levels for asset prices. Noted are the warnings in both 2016 and 2018 from the then CEO's of ANZ and Westpac that the property boom, many now label a giant ponzi, could end badly. COVID and the subsequent policy responses was something nobody saw coming. This is where I think its all gone past the point of an orderly return. It reads like a financial trainwreck in the making when many property lovers gloat about how their predictions for rising prices were on the money for years 2020 and 2021. Its this talk that has no more depth than "its all risen up till now, so it always will"
https://www.nzherald.co.nz/business/bank-boss-warns-of-property-market-…
https://www.interest.co.nz/property/93884/westpacs-david-mclean-says-fl…
So good of them to sound of warnings six years ago and then continue to just absolutely fist the economy, FHBS and owner-occupiers for the next half a decade for (presumably) at least $5b - $10b of profit.
Crocodile tears, from crocodile men, wearing crocodile shoes.
Perhaps an appropriate question from the UK press this morning, on the same topic:
Why should WE put up with the pain predicted in our future by the same people who made it inevitable? The Government conjured up and blew away a mountain of money – hundreds of billions of pounds worth of the funny, all-but-fraudulent money that is the gift only of the private bankers who have them and every other western government in their pocket. They have learned nothing. And yet there they are – business as usual and telling us the bill is past due. Of course the bill is past due, the gormless fools – it was them that ran it up in the first place while some of us, some of us, looked on in horror at the truck crash happening in slow motion. The fault is theirs… those that designed, choreographed and executed the plan. The fact we are in the deepest financial hole ever dug is down to those that conjured up unimaginable sums of money that didn’t exist and sprayed it all over the floor, up the walls and down the drains.
There is little or no recognition by journalists or orthodox economists as to how banking operates. Banks are the largest creators of money through their lending and they have no means to lend money created by central banks and nor do they lend out their customers deposits.
Standard and Poor's tells us here 'Repeat After Me: Banks Cannot And Do Not "Lend Out" Reserves' https://www.hks.harvard.edu/sites/default/files/centers/mrcbg/programs/…
The Bank of England also tells us, 'Banks are not intermediaries of loanable funds - facts, theory and evidence' https://www.bankofengland.co.uk/working-paper/2018/banks-are-not-interm…
Firstly, anyone who compares September 2022 to September 2021 (i.e. annual change figures) is either wilfully misleading the public, or unqualified as an analyst. It seems a long time ago now, but in September 2021 we had collapses in spending, fewer hours worked / dollars earned etc because of COVID restrictions in Auckland (and elsewhere). So, annual % figures reported for September 2022 will be artificially inflated because of the depressed baseline.
For example, median earnings in September 2021 were $1,057 per week - $50 less per week than in August 2021. As the economy came back online, median earnings surged back to $1,150 per week by January 2022. Since January 2022, median earnings have increased by just 2.5% - in nine months (equivalent to 3.3% per annum). You can see the same pattern in filled jobs etc.
There are plenty of other undiscovered insights in the jobs data - for example prime age jobs (people aged 25 - 59) have barely changed at all - all the growth has been kids (15-19) and oldies (60+). Companies are holding wage costs down by bringing in armies of casuals working a few shifts each for minimum wage.
Firstly, anyone who compares September 2022 to September 2021 (i.e. annual change figures) is either wilfully misleading the public, or unqualified as an analyst.
Completely agree with you Jfoe. Wage growth is based on very noisy data with different interventions and conditions at points in time. One of the govt's lobbyist / PR hacks was cheerleading the govt on wage growth and when I demonstrated to him that a pre-Covid baseline painted a different picture, he blocked me on Twitter.
Yes, but companies that employ a lot of minimum wagers are reducing opening hours, managing down labour costs, reducing capacity etc as they try and maintain margins despite increasing input costs (fertiliser, fuel, credit...). So you have people earning an extra dollar an hour, but getting less hours. That is probably why we have rising hourly rates but static earnings.
RBNZ: We need to reduce disposable income, stop people spending, and create some labour market slack to reduce wage pressures (aka chuck people on the dole)
GOVT: Let's welcome back thousands of tourists into the country... spending their money and creating lots of jobs.
Feel free to point out that overseas money being exchanged by tourists for NZ dollars is good for our trade balance, but demand is demand. As with so many other things, Govt and RBNZ are working in opposition. It's stupid.
People will go where they feel they can get ahead financially have a good quality of life. Many don’t see the point in slaving away here to service a debt that os ~8x their salary for an average house that is cold in the winter due to lack of insulation. Australian house prices are still more affordable in relative terms and wages are higher there. A lot of migrants do come to NZ with a target of getting their citizenship and passport to skip to Oz but currently it seems more appealing than NZ for the aforementioned reasons
I'm a contractor in IT. There is a very serious talent shortage in my area (Software Development and Architecture). Now this works for me, I can just increase my rates to take advantage. Make hay while the sun shines.
However, we will hit a point where these skills are just too expensive and rare in NZ. Then what? More outsourcing? Crippled R&D? Collapse in productivity? It's a long term disaster. We have very little home-grown talent. A lot of our IT grads (like in medical), simple go to Aus where they get paid a lot more and can buy a house. It's ridiculous that even well paid and skilled IT workers cannot afford a house. In a country a very low population density.
I'm an immigrant from the UK. Been here for almost 15 years. I love this country but I've seen a rapid decline since Jacinda's government came into power. Everything from the economy to social cohesion has been falling apart.
I'll give it another year. If she's elected again, we're out. I'm sick of her destructive policies, from her racism (co-governance) to her disdain for farmers.
Jacinda Ardern's point of failure was ultimately continuing John Key's policies of talking the housing crisis talk, but walking the path of supporting house price increases for the "wealth effect" (that is, spending now with debt the next generations must pay).
The problem is that starting from the base at which National left things, the housing ponzi has become ever more unsustainable and unstable. House prices became nonsensical as the older generations in governance pumped the market and their own portfolios.
So long as both Labour and National continue to support the devaluing of work and inflating of assets through policy, shortages of teachers, nurses and other critical workers will continue to worsen.
New Zealand could once pay less and still attract people because of "the lifestyle" and being "a great place to raise kids". The problem is, affordable housing was a critical part of that. We cannot support older speculators' greed via policy and still be a good place for people to come and accept lower wages than available elsewhere.
"So, any further unpleasant surprises - and a lower than expected unemployment figure coupled with higher than expected wage rises would be that - and there would immediately be speculation as to what the RBNZ might do in that final OCR review for the year."
Please do not panic, I have done some solid research and have found what is getting very hard to find .
https://www.casketbuildersupply.com/products/coffin-nails-historic-squa…
Things are most certainly changing, there is no denying and I feel it will pick up pace in the New Year. Putting my feelers out I am seeing more mortgagee sales appearing, houses certainly selling for less and sitting on market for very long periods (some sellers still have their blinkers on).
And most interestingly I contacted a trade company the other day expecting the usual "Oh we are flat out, you will have to wait 17 weeks before we can come around" but got "Our work has dropped of a cliff, we would be more than happy to come around and have a look asap". This is a fairly large company that have been around a long time. Going to be in interesting 12 months.
you are right,change is opportunity.before we moaned about too many migrants so we should be happy that they dont want to come,savers were mocked and now the market has finally turned in their favour.a lot of those stagnant listing are orphans that have unconsented bathrooms,plaster cladding,access or neighbour issues as well as unrealistic values on them.
and so it begins ...
5 & 7 Lancaster Road, Beach Haven, North Shore City, Auckland (trademe.co.nz)
Not entirely sure that they 'need' unemployment, however they need a drastic reduction in spending nationwide which historically has come from tightening fiscal policy, followed by less disposable income for many, followed by employee layoffs due to downturn in turnover, leading to further less spending by those who lose their jobs. Unless NZ somehow takes heed and reduces their spending, this scenario will be the outcome, and it is almost guaranteed now given the wheels that have been set in motion both domestically and abroad.
You can argue that the govt still shells out to those unemployed via benefits, and albeit true, there is still the decrease in spending which has the downward economic flow on effects.
I feel this scenario should put benefit bashing to bed. We can now see that our current system (flawed as it may be) requires a level of unemployment to be thrive. I was chatting to a business owner who was complaining about people sitting on the benefit and in the same breath whinging about workers demanding too high wages - which one is it then?... Really starting to look like UBI is the way forward.
I think these rate increases will have to bite soon. We are up for about $500 a fortnight increase when we have to refix in 6 months. It’s not going to be a problem for us but we will probably cut spending to some extent. But I reckon there are a lot of people refixing soon who will get a bit of a shock.
Well if jimmeyH is correct and another wealth concentrating cycle is coming then those with cash may be able to add more properties to their portfolios at bargain basement prices. It sounds bad, preying on the unfortunate, but it may also be necessary for arresting further declines at some point.
Just a statement of reality.
I remember reading about Bob Jones' investment fund in a Stuff article a few years ago - he said they were sitting on 1/4 of a billion cash waiting for the crash to scoop up cheap houses.
I wonder if they still have that strategy, or if the interest deductibility changes scuppered that plan.
Unsure if Sir Bob is really waiting to buy houses. He's famously crapped all over the pitfalls of dealing with residential anything compared to the returns and if he is looking at residential buildings, I suspect it's with an eye to convert them into premium commercial real estate.
Wonder if Max has managed to get the neighbour's on side yet? I expect build/refurbish costs will make this project a challenge .
https://www.stuff.co.nz/business/130183389/max-keys-property-developmen…
Honestly, though... they need a chill pill. They don't have to spend their time doing the following:
Residents of a well-to-do Auckland street are fuming at Max Key's property development company over delays to a housing project that have left them staring at old weatherboard bungalows resting on wooden pallets.
Those with fingers crossed the unemployment rate is gonna rise might be somewhat deluded ... Folk cant get their KFC in Tauranga...Folk cant get their bus in Auckland...800 drivers needed nationwide and thats just for buses.. WOW ... Healthcare has shortages... Prison wardens needed... Fruit pickings coming....waste of time thinking unemployment will rise ... Students going onto the benefit will be about it... Interestingly on the prison warden shortages the old penal code allowed rehabilitated prisoners to apply which in some ways made sense...as for the bus drivers have they regulated 'P' endorsements too tightly? Keep in mind that there will be some drivers that are driving buses today that wouldnt qualify if they had to train as a newbie again, regulations changed and shut out folk that might in fact be rehabilitated... some of these excluded folk are probably driving big rigs that make buses look like a joke. We are now hiring and training bus drivers off the street from scratch so many have very little experience driving class2 and we are allowing them to carry passengers? ,an old timer bus driver once said to me the only drivers that should be considered for driving buses are experienced Class 4/5 drivers not newbies with 12 weeks training... made sense to me.
https://www.sunlive.co.nz/news/305979-stressed-kfc-staff-abused-at-driv…
https://www.nzherald.co.nz/nz/nearly-1000-auckland-bus-services-cut-auc…
Problem is, all these areas face a dire wage shortage relative to housing costs. No easy way around that while other countries offer a far better equation.
New Zealand being a lower-paid location folk could migrate to for the lifestyle and because "it's a great place to raise kids" worked when housing and wages were more connected.
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