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.
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