The Reserve Bank expects labour market figures out in the coming week to show rising unemployment. If unemployment doesn't rise - or indeed if it even falls - this will heap more pressure back on our central bank in its inflation fight

Don't expect to hear cheers from the Reserve Bank building if the latest labour market figures reveal a rise in unemployment.

After all, it might be a bit crass to appear pleased at people losing jobs. But you've got to believe the RBNZ folk WILL quietly breath a big sigh of relief if our super hot labour market is finally showing tangible signs of cooling (IE through a rise in unemployment).

We'll find out what's what when Statistics NZ reveals the suite of labour market measures for the June quarter on Wednesday (August 2). This is a biggie.

As I've said before, the labour market figures are actually the key economic data to follow at the moment - even more so than the inflation figures.

And while that might sound odd when we've got annual inflation still running at a too-hot-by-far 6%, the point is that until the RBNZ sees some 'slack' in that labour market, it can't be confident about getting the inflation genie back into its bottle. The 'bottle' in this case is the 1% to 3% target range that inflation has now been outside of for two whole years. The RBNZ wants inflation down. It needs unemployment UP.

We've been experiencing a quite astonishingly tight jobs market. 

Unemployment did spike higher at the start of the pandemic in early 2020, with the jobless rate getting as high as 5.2% by September of that year. 

However, as it became clearer that the economy was not going to capitulate - in fact far from it - employees started becoming a scarce commodity, not least because the closed borders largely closed off the option for employers of importing labour to fill gaps.

So, by September 2021, unemployment was down to a historically low 3.3% and it has been bouncing somewhere around that level since. It was 3.4% as of the March quarter, which was the same as in December 2022.

The RBNZ reckons (as per forecasts in its May 2023 Monetary Policy Statement) that the figures out in the coming week will show unemployment blipping up to 3.5% as of the June quarter. The central bank is then expecting a quick cooling of employment conditions - forecasting that unemployment will be 4.6% by the end of this year.

However, it is fair to say the labour market figures have confounded the RBNZ's expectations more than once in the recent past. 

If we go back to the RBNZ's MPS document and forecasts in May 2022, we can see that then the central bank was forecasting that unemployment would have risen to 3.8% by March 2022 (it was 3.4%) and would go on to rise to 4.0% by June of this year.

In its February 2023 MPS the RBNZ forecast 3.5% unemployment for the March quarter and 3.8% by June.

So, as we can see, the labour market has consistently been hotter for longer than the RBNZ has expected.

While the last annual inflation figures actually came in lower than the RBNZ forecast (6.0% versus a pick of 6.1%) the figure for domestically generated inflation fell only from 6.8% to 6.6% - significantly stronger than the RBNZ's 6.3% pick. 

Full employment is helping to keep people spending, and that's allowing suppliers to keep raising prices. If there was to be less job security, through rising unemployment, that would equal less spending. That's the theory anyway.

With the last inflation figures therefore being a big disappointment as they amply demonstrated that domestically generated inflation has become very 'sticky', the RBNZ will be feeling some heat as we go into the release of these labour market figures.

Remember, having hiked the Official Cash Rate at tearing speed up from just 0.25% at the start of October 2021 to 5.5% now, the RBNZ in May indicated it was finished - for now at least - with hikes.

And sure enough the RBNZ 'paused' at its OCR review earlier this month. 

Those inflation figures will have not helped the central bank's comfort levels, but they won't have moved the dial when it comes to the next OCR review on August 16. The RBNZ will still be in 'pause' mode...unless...

What if the unemployment rate were to NOT go up, or even come down lower? Cat. Among. Pigeons. It would depend on the detail in the figures. But this would definitely be a shaker for the RBNZ.

After the August 16 OCR review, there's only one more rate review (on October 4) before the election on October 14. I've already indicated that I reckon the RBNZ's pretty keen to NOT have to go to the rate hiking well again before the election.

If therefore the coming week's unemployment number does NOT go up, the RBNZ will be in a pickle. And you could confidently expect the markets to start pricing in another rate hike again. For the record, I still think the RBNZ would in any case sit tight on August 16, but an unfavourable (for the RBNZ) jobs figure would lead to a very uncomfortable review - and observers would definitely regard the August review as a 'live' one in such circumstances.

So, the stakes are high for the coming week's labour market figures. I didn't have any economists' previews in front of me at time of writing, but it appeared from various comments that at least some of the economists were pretty much concurring with the RBNZ that the unemployment figure will come in at 3.5%. (After penning those words I received ANZ's preview - and the ANZ economists are picking 3.5%.)

If it is at that level, or even slightly higher, then the RBNZ folk will be breathing that aforementioned sigh of relief, and there will be NO CHANCE of any more OCR hikes before the election.

Such information as has come to hand ahead of the release of the labour market figures has tended to be supportive of the idea of the jobs market finally starting to tighten.

What we will likely see is that there will again be plenty of jobs getting filled in the June quarter (some 22,000 extra jobs were added in the March quarter) - but remember there's now people getting off planes again to help fill those jobs. More than 105,000 overseas workers arrived into New Zealand in the first half of the year.

The anecdotal suggestion has been that the unemployment figure didn't go even lower than it did because employers simply couldn't find suitable staff while the borders were closed and so many jobs actually went unfilled. So, it's possible the figures even understated how hot the labour market has been. But these jobs that were not filled are now being filled, courtesy of the inflow of migrant workers. 

All of which suggests the market should now be tightening and unemployment may start to rise. 

The latest BNZ-SEEK Employment Report for the month of June showed the third consecutive monthly drop in job ads, which would appear a fairly clear sign of cooling demand for staff - and the sort of thing you would expect to see as a precursor to a rise in unemployment.

The coming week is not solely about job numbers of course, there's the not insignificant matter of pay.

A tighter than tight jobs market has meant that employers have had to pay up. The fact that a lot of people have been able to get pay rises at least close to the rate of inflation has enable people to keep spending - and it has enabled goods and services providers to keep inflation pumping with price rises.

Stats NZ's labour market data shows a number of measures of wages. I prefer to look at the figures for the annual rise in average hourly earnings. The RBNZ's looking for this measure of wage inflation to drop to 7.6% from 8.2% as in the March quarter. Theoretically as more jobs get filled the pressure should come off these wage rise figures. However, the RBNZ will want to see the evidence - remembering that it did actually forecast 7.6% wage inflation for March and ended up being well shy of the mark with the actual figure as mentioned coming in at 8.2%.

Anecdotally again, wage pressures do now appear to be easing.

So, there we are. All will be revealed. We'll get figures on Wednesday that either show the RBNZ is on track, or alternatively that it's applecart has been upset

The available evidence at this stage suggests we'll most likely get an outcome that enables the RBNZ to breath a little easier. But then again, where would life be without little surprises along the way? 

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