The Reserve Bank (RBNZ) will get a look at one of the last remaining key pieces of economic data in the coming week ahead of the first Official Cash Rate (OCR) review of the year on February 28.
On Wednesday, February 7, Statistics NZ will release the suite of labour market figures for the December quarter, including the unemployment numbers and latest wage information.
Following changes made by the new Government, the RBNZ now no longer needs to consider 'maximum sustainable employment' as part of its Policy Targets Agreement, but that makes no real difference at the moment, since the recent problem with the labour market has been that we've had the closest thing you will ever see to maximum employment - and it's been very inflationary.
Cooler conditions in what has been a raging hot labour market have been seen as vital as part of the RBNZ's attempts to get inflation back into its targeted 1% to 3% range and - explicitly, to the 2% midpoint.
The December quarter inflation figures themselves have already been released and were on the face of it very encouraging, with the Consumers Price Index (CPI) showing an annual rate of growth of 4.7%, down from 5.6% as at the September quarter. Remember, the CPI peaked at 7.3% in June 2022 but has previously been falling only slowly.
The 'headline' inflation figure for the December quarter came in well below what the RBNZ had forecast, which was 5.0%. But the RBNZ's been doing a reasonably good job of masking its delight at this (I say this tongue-in-cheek), principally because the so-called non-tradable (domestic) part of the inflation came in at 5.9%, which was actually more than the RBNZ forecast.
RBNZ's chief economist Paul Conway, breaking the RBNZ's three-month summer 'radio silence' this week with some comments on recent economic data developments pointedly said that "monetary policy is working, with the economy slowing and inflation falling. But we still have a way to go to get inflation back to the target midpoint."
That the RBNZ felt it needed to come out with some public comments now ahead of the first OCR review of the ear on February 28 was probably mostly due to the September quarter GDP figures released in mid-December, which showed a surprising 0.3% economic contraction against the RBNZ's forecast for 0.5% growth. But more than that, Stats NZ had made significant downward revisions to earlier GDP figures - and this had included the revelation that NZ in fact had a 'technical recession', with two consecutive quarters of negative GDP growth earlier in 2023.
Conway played all this down, pointing out: "...Private demand in the economy, which is more interest-rate sensitive, has mostly been revised up, with stronger consumption and business investment than first reported. In fact, levels of consumption and investment in the third quarter 2023 GDP numbers are almost exactly as estimated in the [RBNZ's] November Statement".
The upshot is that the RBNZ still has its 'hawkish' hat on and isn't yet in the mood to concede to those looking for quick interest rate relief. And that's notwithstanding the fact that the wholesale interest rate markets are still projecting for this year three (25-point) cuts to the OCR, which is currently at 5.5%.
Can and will the coming week's labour market figures do anything to change the RBNZ's mind on anything?
In reality, it would appear the RBNZ would only be significantly affected by an adverse surprise. For the record, at time of writing the markets were pricing in a very small chance that the central bank might actually raise the OCR again on February 28. So, a 'bad' result with the labour market figures might give pause for some thinking - though really, it would be a huge surprise if another OCR rise did materialise now.
What would be a 'bad' result for the RBNZ? Well, in order to keep the economy cooling and for pressure to come off inflation, the RBNZ needs a tighter jobs market - IE for the unemployment rate to go up. It is starting to do this. The unemployment rate went from 3.4% as of the March 2023 quarter to 3.6% for June 2023 and 3.9% as of September 2023.
In its most recent forecast contained in the November Monetary Policy Statement (MPS), the RBNZ forecast unemployment of 4.2% for the December quarter, then rising to 4.6% by the March 2024 quarter, 4.9% by June 2024 and 5.0% by September 2024. The RBNZ forecasts a peak level of unemployment of 5.2% in June 2025.
A key reason for the tightening of the jobs market to date has been the massive influx of labour from offshore, with Stats NZ reporting that there was a nearly 130,000 net gain of migrants in the 12 months to November.
RBNZ's Conway noted this week that "strong inward migration has clearly helped alleviate labour shortages".
The influential NZIER quarterly survey of business opinion (QSBO) for the December quarter survey continued to show a sharp easing in labour shortages, "with firms reporting that it is easier to find both skilled and unskilled labour".
"This result presents a significant shift from a year ago when shortages for both types of labour were very acute," the NZIER said.
And yet, there's still signs of resilience out there in the labour market. Stat's NZ's monthly employment indicators for December showed a 0.2% seasonally adjusted monthly climb in filled job numbers.
Against this, job ads are continuing to tumble, according to the most recent BNZ/SEEK Employment Report. It showed that on a seasonally adjusted basis ads have now fallen in 13 of the last 16 months to be 37% down on the peak reported back in August 2022.
Anyway, does all this mean the RBNZ is in for an unpleasant surprise with the unemployment numbers?
Economists don't think so. I didn't have all the economists' previews available at time of writing this, but the major bank economists, at least, seem to be in reasonable concurrence with the RBNZ, picking between 4.2% and 4.4%.
Westpac senior economist Michael Gordon, who is picking a 4.2% unemployment rate, says if the results pan out as expected, "the RBNZ will most likely stick with its recent messaging: we’re making progress on taming inflation, but there’s still a long way to go, and the greater risk is in taking their foot off the brakes prematurely".
He says although the requirement to “support maximum sustainable employment” has now been removed from the RBNZ’s mandate, the labour market figures will still hold significance.
"The unemployment rate is one of the best real-time gauges of the economy (that is, it’s generally robust to any future data revisions). The RBNZ will look to the unemployment rate as a gauge of how hot the economy is running, and hence how quickly those stubborn inflationary pressures will recede."
ANZ economist Henry Russell and chief economist Sharon Zollner, who are picking a 4.3% unemployment rate, say they expect the labour market remained on a loosening trajectory in the fourth quarter, "with capacity indicators continuing to suggest slack has emerged and the labour market is no longer in an inflationary state".
"While moderating labour demand as the economy slows has played a role, the ongoing surge in labour supply continues to be the key driver. Record net migration inflows have resolved reported labour constraints."
They say they don’t expect the labour market data to be a game changer for the RBNZ’s February 28 OCR meeting.
"Despite the relative resilience of labour demand, the ongoing supply expansion due to record-high migration continues to see spare capacity emerge across the labour market. As a result, wage pressures are now gradually easing, which will contribute to a moderation in domestic inflation over 2024. Forward-looking labour market indicators continue to point to a rapid loosening across 2024," they say.
"...Monetary policy is working, though the RBNZ needs to see a sustained period of slack emerge to be confident that domestic inflation pressures will dissipate. Our current estimate is that by August, conditions will be in place for the RBNZ to begin easing policy settings."
*This article was first published in our email for paying subscribers early on Friday morning. See here for more details and how to subscribe.
We welcome your comments below. If you are not already registered, please register to comment
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.