By Bernard Hickey
Employment and wage growth weakened more than expected in the September quarter, increasing the chances of a fourth rate cut on December 10 and raising the prospect that record net migration combined with a slowing jobs market could push the unemployment rate up towards 7% next year.
Statistics New Zealand reported employment fell 0.4% or 11,000 in the September quarter from the June quarter, which was the first fall in employment in three years and weaker than market expectations for growth of around 0.4% and the Reserve Bank's forecast for growth of 0.5%.
However, the unemployment rate only rose by 0.1% or 3,000 to 6.0% and a total of 151,000, which was in line with market expectations because the participation rate fell 0.7% to 68.6%. The latest quarter had the largest increase in the number of people not in the workforce since the March 2009 quarter. If the participation rate had stayed at its March quarter record high of 69.5%, the unemployment rate would have been 7.2% in the September quarter.
“Until recently, the labour market has been keeping pace with New Zealand's population growth, but in the past three months this has changed,” Statistics NZ labour market and households statistics manager Diane Ramsay said.
Annual employment growth fell to 1.5% in the September quarter from 3.0% in the June quarter.
“Over the year, most growth was in construction. The vast majority of this growth was in Auckland, as construction growth there continued to outpace Canterbury," Ramsay said.
Auckland jobs rose 11,500 over the year, while Bay of Plenty jobs rose 8,100. They were the two largest contributors to annual jobs growth of 34,000.
Wage growth weak
Wage growth was also softer than forecast, which is expected to increase the pressure on the Reserve Bank to cut interest rates when it releases its December quarter Monetary Policy Statement on December 10.
Private sector wage growth, as measured by the Labour Cost Index which strips out the effects of promotions, fell to 0.4% in the September quarter from 0.5% in the June quarter and was lower than the consensus economist forecast for growth of 0.5%. This meant annual private sector Labour Cost Index inflation fell to 1.7% in the September quarte from 1.8% in the June quarter.
Private sector average hourly ordinary time earnings, as measured Quarterly Employment Survey, rose 0.9% in the quarter, which was down from 1.2% in the June quarter and took annual wage inflation down to 2.7% from 3.2% in the June quarter.
Westpac Senior Economist Satish Ranchhod said the figures were weaker than expected, including falls in employment and participation and "a mild downside surprise on wages."
"The sharp pull back in labour force participation partially offset the fall in employment, resulting in only a modest increase in the unemployment rate," Ranchhod said.
"Wage inflation has been dampened by low consumer price inflation, which has meant that cost of living adjustments to wages have been limited," he said, noting slowing GDP growth and a rising unemployment rate meant there was limited scope for any matrial rise in wage inflation.
"Overall, today’s data adds to the signs that the economy has lost some steam, and reinforces our expectation that the RBNZ will need to continue cutting the OCR over the coming months."
ASB Chief Economist Nick Tuffley said the labour market was weak across all three surveys (HLFS, QES and LCI).
"The data reinforce our view that the RBNZ should cut the OCR again in December. And the risk is the OCR gets cut even lower over 2016," Tuffley said.
"There is a growing risk that migration inflows remain strong even as employment growth moderates over the next year, resulting in a drift higher in the unemployment rate and subdued wage growth," he said.
ANZ Senior Economist Philip Borkin said the employment perhaps overstated the degree of weakness, pointing to the Quarterly Employment Survey's measure showing filled jobs rose 0.7% in the quarter and the Household Labour Force Survey's measure of hours worked rising 0.4%, while the QES measure of paid hourse rose 0.9%.
"It is also interesting that the drop in HLFS employment was led entirely by a 4.1% q/q drop in part-time employment. Full-time employment actually rose 0.2% q/q," Borkin said.
"Nevertheless, with the unemployment rate continuing to grind higher and wage growth benign, it is certainly a backdrop consistent with a need for more monetary policy easing," he said.
"Today’s figures arguably increase the odds of that easing being delivered as soon as December, but we are not entirely convinced of that yet, with the NZD, dairy prices and the global backdrop arguably set to hold sway. Labour market data typically lags the rest of the economy, and more timely growth indicators are now picking up."
First NZ Capital Economist Chris Green said the underlying tone of the figures was unambiguously weaker than the 6.0% unemployment rate suggested.
"Significantly, the wages outturn continues to remain below the RBNZ’s 2% inflation target mid-point, suggesting that wage-setting outcomes appear to be settling at levels lower than is consistent with the inflation target," Green said.
BNZ Senior Economist Craig Ebert said the figures were definitely underwhelming, but not as negative as the headline figures suggested.
"As such, they keep the case for further OCR easing alive, just when the market looked to be going off the idea," Ebert said.
However, BNZ did not believe the jobs market was stalling.
"Indeed, it’s looking increasing likely that employment will find its feet in Q4 and keep expanding at reasonable rate, in a trend sense, in the New Year," Ebert said.
Ebert said the 1.7% annual LCI inflation was consistent with the Reserve Bank's 1-3% target band and QES private sector hourly wage inflation of 2.7% for the year confirmed real wage growth of over 2% for the year.
"That’s pretty solid from an employee’s point of view," he said.
(Updated with more detail, reaction, chart)