By Bernard Hickey
Unemployment fell by more than expected to a five-year low of 5.6% in the June quarter, but largely because the proportion of working age people looking for a job fell from record highs.
Employment grew by a slower-than-forecast 0.4% or 10,000 in the quarter and wage inflation rose slightly, but not enough to change the outlook for interest rates.
Private sector average ordinary time hourly wages rose 3.1% in the quarter from a year ago, but this was offset by just 1.3% annual wage inflation in the public sector. Total earnings growth was 0.2% for the quarter, leaving annual wage growth unchanged at 2.5%.
Statistics New Zealand reported the unemployment rate fell to a five year low of 5.6% in the June quarter from a revised 5.9% in the March quarter after the participation rate fell 0.3% from record highs to 68.9% and employment grew 0.4% to 2.328 million. The number of unemployed people fell by 9,000 or 6.3% in the quarter to 137,000.
The fall in the unemployment rate was more than most economists expected, but the 0.4% rise in jobs was slightly less than most expected. The consensus forecast for unemployment was 5.8% and the forecast for jobs growth was 0.7%.
The New Zealand dollar fell slightly after the release of the results, which were seen as not strong enough to dislodge the Reserve Bank from its current pause in interest rates.
“We continue to see more people move into employment and although the participation rate has dropped from a peak last quarter, it is still at an historically high level,” labour market and households statistics manager Diane Ramsay said.
Annually, the number of people employed rose 3.7% in the Household Labour Force Survey (HLFS), Statistics NZ said. This was lower than the 4% forecast by many economists.
Employment growth in Canterbury accounted for almost half of the total national employment growth over the year.
"Despite a lift in the minimum wage pushing up wage inflation, the general wage backdrop remains contained," said ANZ Senior Economist Mark Smith.
"There is little in today’s data to change our view that the RBNZ will pause for the remainder of 2014, with a modest degree of OCR lifts beyond then," he said.
Westpac Senior Economist Michael Gordon said the ongoing tightening in the labour market supported the Reserve Bank’s campaign to normalise interest rates
"However, we don’t think today’s figures create any additional urgency to hike rates again this year; in any case, in terms of the news over the last 24 hours, the sharp deterioration in international dairy prices will probably be more of a headache for the RBNZ than a gradually strengthening labour market," Gordon said.
Wage inflation up a bit
Annual wage inflation, as measured by the labour cost index (LCI) salary and wage rates (including overtime), rose 1.7% compared with annual consumer price inflation of 1.6 percent.
“Annual wage inflation edged up and this was driven by private sector annual wage rate growth of 1.8 percent – influenced by the minimum wage increasing 3.6 percent. Public sector annual wage rate growth was unchanged at 1.2 percent,” Ramsay said.
Central government labour costs rose just 1% in the quarter from a year ago, which was the lowest annual rise since the series began in 1995.
The unadjusted Labour Cost Index for the private sector rose 3.4% in the year to June, which was the fastest rise in two years. Average ordinary time hourly earnings in the private sector rose 3.1% in the quarter from the same quarter a year ago, which was the fastest rate in more than two years. But it was offset by a 1.3% rise in public sector wages over the year, which was the slowest rate in more than two years.
Economist reactions
Economists said the wage growth figures were mixed and unlikely to spook the Reserve Bank.
"The headline Labour Cost Index also arguably overstated the underlying trend in wage inflation," said Westpac Senior Economist Michael Gordon.
"The number was boosted by a lift in the minimum wage, which added about 0.1 percentage point to the result. Excluding this effect, wage inflation picked up a little but hasn't broken out of its recent range," he said.
JP Morgan Economist Ben Jarman said the labour market was starting to tighten, with private sector labour cost inflation of 0.6% for the quarter being slightly above the 0.5% market consensus.
"We still feel that the early progress made by the RBNZ in their hiking cycle has put them ahead of the inflation impulse, justifying a near term pause," Jarman said.
"But today’s data should put officials at ease that there is at least some impulse to be in front of. The fall in the unemployment rate flags that wage growth should still be biased higher from here, which suggests the pause in the cycle shouldn’t be too prolonged – we expect another rate hike before year-end," he said.
ASB Economist Nick Tuffley also noted the slightly higher than expected private labour cost inflation.
"If the decline in the participation rate is sustained, then wage pressures could pick up a little sooner than we expected. We had been expecting the participation rate would be held up by strong migration, and in turn that wage pressures wouldn’t pick up swiftly in the near term," Tuffley said.
He noted that Canterbury construction labour cost inflation continued to moderate, while construction labour cost growth had been broadly stable over the last year.
"The results are largely mixed for the RBNZ. Labour activity was slightly more modest than market expectations, both in employment and hours worked. However, neither are particularly reliable guides to GDP itself. On the wage front, there were warning signs that wage pressures could pick up by more than anticipated," he said.
"From the RBNZ’ point of view, the main takeaways from the labour market are around the wage pressure signal from Q2 wage trends, and less from the fall in the unemployment rate or moderation in in employment growth. But some comfort will be taken from the relatively mild pace of construction labour cost pressures."
ASB retained its view the next rate hike would be in December, although the risks were for a later resumption because of the continued fall in dairy prices and the still strong NZ dollar.
Political reaction
Employment Minister Steven Joyce said the results showed the continued strength of the New Zealand economy.
"It is particularly pleasing to see young people benefitting from our economic growth with 11,300 more 15-19 year olds in employment in the last year. The 15-19 years NEET rate is down to 7.4 per cent in the quarter, which is its lowest level since prior to the GFC in mid-2008." Joyce said.
Labour Employment Spokesman Grant Robertson said there were 32,000 more people unemployed than when National came to power in 2008.
“The National Government’s idea of economic development has been surfing the wave of commodity prices. Along with commodity prices it is once again Christchurch – with the rebuild work – that is skewing the figures with a regional unemployment rate of 2.8 per cent. Disaster recovery is not an economic plan." Robertson said.
“Many New Zealanders are not seeing the benefit of the supposed improvement in the economy. Average weekly earnings have actually decreased in the last quarter, and 43% of wage earners have not seen a pay rise in the last year."
Green Co Leader Metiria Turei said Labour Cost Index figures, which measure the cost of a fixed quantity and quality of labour, showed ordinary time salary and wages had dropped 4.2% from the September 2008 quarter after adjusting for inflation.
“Today's numbers confirm what most people have been feeling for years - their pay is not keeping up with the rising cost of living,” Turei said.
“This gives the lie to Bill English’s claim that average wages have risen under National. For people who are struggling to pay their power bill or haven’t got a job - this is far from a rock star economy."
(Updated with more detail, economist reaction, NZ$ move, chart, political reaction)
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