September quarter labour market data unlikely to be a game-changer for the RBNZ. Unemployment rate increases to 4.2%, wages rise to 2.4%

September quarter labour market data unlikely to be a game-changer for the RBNZ. Unemployment rate increases to 4.2%, wages rise to 2.4%

The unemployment rate was bumped off its 11-year low in the September quarter, rising in line with market expectations from 3.9% to 4.2%.

Painting a rosier picture, the underutilisation rate fell to a 10-year low of 10.4%, while the labour force participation rate increased slightly quarter-on-quarter, but was down year-on-year to 70.4%.

Tightness in the labour market gave wages a boost.

They increased by 2.4% over the year - the largest annual increase in a decade.

However stripping out the minimum wage increase and major pay settlements for teachers, police and nurses, wages only increased by 1.8%. Private sector wages increased by 2.3%.

Inflation, or the Consumer Price Index, was 1.5% in the September quarter. 

Markets hardly reacted to the data. The NZ dollar initially inched a tiny bit lower against the US, but quickly recovered. 

The question looking forward is how much weight the Reserve Bank (RBNZ) will place on this data when it comes to review the Official Cash Rate (OCR) next Wednesday.

It slashed the OCR by a whopping 50 basis points in August, just after the June quarter labour market figures were published and showed the unemployment rate dropping to an 11-year low.

It was mindful of the fact the labour market figures are known to be volatile and importantly, are a backward-looking indicator. Forward-looking indicators, like business confidence, paint a much gloomier picture of the economy.

The RBNZ said it front-loaded the August cut in an effort to stimulate the economy in advance of it potentially nose-diving.

Markets had been pretty certain the RBNZ would cut the OCR by 25 points to 0.75% on November 13, but in recent weeks started pricing the chances of a cut at 50-50, as the Federal Reserve indicated it would push pause on its interest rate cuts.

The September quarter data largely came in, in line with the RBNZ’s expectations.  

The unemployment rate came in below what the RBNZ forecast in August (4.2% versus 4.4% forecast). However the participation rate came in slightly lower (70.4% vs 70.6% forecast).

Annual private sector wage growth was also stronger than the RBNZ had forecast (2.3% vs 2.0% forecast).

The RBNZ will, however, be mindful of the fact private sector wage growth was given a boost by the higher minimum wage and would've been affected by pay settlements pushing up public sector wages by 3% over the year.

Most economists not swayed by data and continue to pick a Nov OCR cut

ANZ economists said the labour market figures were unlikely to be a game-changer for the RBNZ when it reviews the OCR.

"An unemployment rate of 4.2% still indicates a ‘tight’ labour market, but it shouldn’t be forgotten that the RBNZ now has an employment mandate and the outlook for the labour market is looking cloudier.

The labour market lags economic activity, domestic growth doesn’t look like it is going to recover sharply from here, and businesses’ hiring intentions are low.

"We expect that below-trend economic growth will see the unemployment rate move up a little further over the next year, peaking around 4.5%, before a gradual recovery in GDP growth helps push it lower again.

"Although it isn’t the ‘lock’ it was, on balance we expect the RBNZ to cut the OCR 25bps next week at the November MPS and signal that further cuts remain a possibility should the dataflow and outlook warrant – we expect it will, in time."

Kiwibank economists had a similar view: "Employment growth continues to dry up as firms are less eager to hire in the face of a slowing economy.

"Today’s labour market report released by Stats NZ was all about pay. 'Payback' from a surprisingly solid June quarter print, the Government 'paying' up for frontline public service workers, and the RBNZ should 'pay' heed to a deteriorating labour market and cut the OCR next week."

Westpac economists however, who expect the RBNZ to keep the OCR on hold next week, saw the results as "a modestly positive surprise for the RBNZ relative to its (now dated) forecasts in the August Monetary Policy Statement".

"It appears that the unemployment rate has flattened off over the last year or so, rather than rising as we expected, as the wider economy has slowed."

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9 Comments

Wages up/unemployed up. I.e we cannot get a return on your labour at that price.

Given how low unemployment is we are really scraping the barrel in terms of quality of available applicants, last time we went to a labour hire crowd for a couple of workshop hands for a couple of weeks we cancelled them after a few days, they cost more in the workshop supervisors time and broken equipment than they were worth. Simply having a pulse and turning up on time doesn't cut it.

There has also been a trend in recent years for small firms to expand by utilizing low-skilled immigrants; the owners have taken themselves off the tools so as to manage their new empire. For example, a friend got his block of three flats (which he had inherited) repainted. He used a firm of painters that had been around for years. There were two Somali brush-hands who seemed to be doing a reasonable job and a South African supervisor who checked on their work now and again. It all seemed ok but at the end of the job I noticed that they hadn't overlapped the paint on the the window surrounds on to the glass and some areas had obviously only had one topcoat. Eventually,after complaining, the New Zealand owner of the firm came and inspected the work and fortunately decided it would have to be redone.

Small AND large firms

Surely that's a symptom of a low wage economy though, right?
The acquisition of skill represents a cost - one that is largely borne by the individual worker in NZ. In a low wage, high cost economy, upskilling is extremely expensive at the lower end.

It's the National party stance all over - bemoan the fact that we have a skill shortage, but avoid at all cost implementing anything that would raise the labour skill level.

The incumbents are doing a much better job in raising the skill level of our workforce.
The PGF has invested upwards of $100 million towards skill training and development in our regions. Also, billions are being invested by the fund on mid-skilled industries in the regions to ensure those skills are adequately utilised to diversify our regional economies.

Plus, thousands of additional places are being added to the Gateway programme, which has been a huge success among employers facing capacity crunch due to 'real' skill shortages.

Tightness in the labour market gave wages a boost.
They increased by 2.4% over the year - the largest annual increase in a decade.
However stripping out the minimum wage increase and major pay settlements for teachers, police and nurses, wages only increased by 1.8%.
Private sector wages increased by 2.3%.

And yet residential mortgage debt rose by ~6.0% per annum ending September, thus sustaining a deflationary influence over the worth of wages earnt.

deleted rant...

yet NZ has record hardship payments