Wage inflation hit a record high of 3.6% in the September quarter from a year ago as local government and health industry wages accelerated, figures from Statistics NZ's Labour Cost Index (LCI) show. The figures will provide little comfort for those hoping for more big cuts in official interest rates on December 4. Reserve Bank Governor Alan Bollard said last month the size and timing of future cuts in the Official Cash Rate would depend on evidence of easing domestic inflationary pressures. Today's figures are not evidence of easing domestic inflation figures. Strong wage growth in local government administration and the health sector wages were factors in the growth, which was the highest since the survey began in 1992. Private sector wage growth 1.1% for the quarter and was 3.7% in the September quarter from a year ago, which was much stronger than the market consensus of economists' forecasts of 0.8% and 3.4% respectively. Here's some of what ANZ National's economists thought.
A number of respondents reported the reason for the increase in wages over the quarter was to reflect increases in the cost of living. This is a dynamic the RBNZ will keep a very close watch over. Late cycle strength is typical, but we expect a peak is near. While the magnitude of the wage increase in the quarter was a surprise (and well above market expectations), the fact that wage growth remains elevated shouldn't be. It is typical for wages to be one of the last indicators to turn in response to the economic cycle. With the unemployment rate now turning (and further confirmation of this is likely on Thursday) and firms reporting it much less difficult to find both skilled and unskilled staff, workers will have less bargaining power to push for the wage increases they experienced over recent years. A falling headline inflation rate over coming quarters will also help take pressure off wage indexation adjustments. If a peak in wage growth has not already occurred, we expect it to be very close. Nevertheless, the level of wage growth will still concern the RBNZ. The Bank singled out labour costs as a concern (among price pressure from other non-contestable areas) at their latest OCR Review. Today's data shows that the Bank's concern is justified. QES employment gauges were mixed. Paid hours fell by 0.3 percent in the quarter, following a 0.4 percent increase in June. Our seasonally adjustment estimate of filled jobs rose by 0.3 percent. Splitting out the government administration, education and health sectors from paid hours, the "market" sector experienced a 0.5 percent contraction over the quarter, while "non-market" rose 1.3 percent. This is a very similar story to the June quarter and reinforces that it is really only the government sector that is providing the engine for growth at present. There is nothing really in today's data to change our view of a sharp 1.0 percent contraction in employment growth in the quarter and an increase in the unemployment rate to 4.3 percent. We expect hours worked "“ a better indication of overall economic activity "“ to have fallen, suggesting a contraction in Q3 GDP growth. While there is limited "evidence" for easing domestic cost pressures as yet for the RBNZ, there is nothing in today's data to stand in the way of further interest rate cuts. At their latest OCR Review the RBNZ stated that further monetary policy easings were warranted, but this was conditional on "evidence of actual reductions in domestic cost pressures". As a key driver of medium-term inflation, the labour market will be viewed as a key part of this "evidence". With wage inflation still elevated this evidence is not yet apparent. However, the RBNZ will be well aware that wage increases of the magnitude seen in recent years will not be maintained if the unemployment rate is increasing sharply and the economy is slowing. Thursday's data will provide a more important read.
Here's what BNZ's economists had to say in their note titled "Wage push comes to shove"
This morning's wage and salary data were on the strong side of expectations (as was the QES filled-jobs series). This will annoy the Reserve Bank, which, as it stated at October's OCR review, is looking for hard evidence of waning domestic inflation to bolster the case for further cash rate culling. Still, the forward-looking element of the Bank's job is getting uglier by the day, which promises to loosen the labour market and bring wage growth back down to earth, albeit with its usual lag. And let's face it: this needs to occur. Less rapid wage growth will need to be a part of the NZ economy managing itself back to normality, as best it can. For the moment, though, it remains extremely fast. This seriously strong pace was corroborated by the wage and salary information in this morning's Quarterly Employment Survey (QES). Its private sector measure increased 1.1% for 5.2% y/y. Its all-sector series increased 1.5%, which lifted the annual speed to 5.5%, from 5.3%. To be sure, this is supportive for household income, at a time when most else is turning into a stiff headwind for the sector. But let's not fool ourselves that sustained high wage inflation would be any elixir to the economic slowdown. It will simply cripple business profitability even more than has happened to date, which would thus lead to greater redundancies and weaker investment than has already been indicated. In this respect, the recently strong wage push is coming to shove. We expect to see firms react to the pay rate surge, and the gathering economic slowdown "“ both in NZ and globally "“ by trimming staff numbers to more sustainable levels.
What I think it means These figures show that inflation remains a concern that the Reserve Bank can't ignore. Wage growth is a lagging indicator, but it is one of these pieces of "evidence" that Bollard will want to see before cutting interest rates deeply. If I had to put my life on it, I would say interest rates shouldn't be cut too much more. We need high interest rates to encourage saving and discourage borrowing and spending. Exporters, borrowers and business owners will want to rip my throat out, but we have a significant current account, foreign debt and overspending problem. If it was me pulling the lever I'd cut 25 basis points on December 4 to 6.25% rather than the 50-100 basis points that some economists expect. Many of the exporters and borrowers above will be glad I don't have my hands on the lever. I reckon the one signal that savers and borrowers understand is interest rates. I wonder whether an OCR at 3.25% (as JP Morgan has forecast) will send that signal. The figures also expose the rampant wage growth going on in local government in particular, and in government generally. I have a horrible feeling that won't change after this weekend, regardless of who's in charge. What do you think? Comments below