Weekly Economic Commentary 31 October 2022
Analysis and forecasts of the economy and markets, along with previews of data for the week ahead.
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Red hot labour market raises RBNZ red flags.
The labour market is red hot. And if anything, it has heated up further over recent months. Those signs of heat are also manifesting increasingly in pressure on wages. And while that’s good news for workers in light of similarly red- hot inflation, this trend presents a fresh set of problems for businesses as well as the Reserve Bank.
Indeed, the labour market is crucial to the Reserve Bank’s efforts to bring inflation under control. With the unemployment rate close to a record low, and employers desperate to fill labour shortages, wages rates have been charging higher.
Those labour costs are in turn being passed through into prices – the latest CPI report shows that price rises are increasingly widespread across all categories. That’s seen local forces starting to take over from global ones as the main source of overall inflation pressures.
With that in mind, the September quarter labour market surveys, released this Wednesday, are unlikely to give much comfort to the RBNZ. We expect a solid 0.6% rise in employment for the quarter, and a small dip in the unemployment rate back to its record low of 3.2%. On top of that strong jobs growth, we also expect a 1% rise in the Labour Cost Index (LCI). That rise will see the annual growth rate jump to a 14-year high of 3.6%.
Our employment forecast is stronger than what the RBNZ assumed in its August Monetary Policy Statement. On the other hand, our wage growth forecast is a little softer – the RBNZ is already braced for some very strong wage growth, so it would take a lot to surprise them to the upside. That said, we’re on the same page in expecting wage growth to head sharply higher.
Recent indicators, including tax data, suggest that jobs growth has regained some momentum in recent months after an earlier softer patch. While this measure doesn’t entirely correspond with the Household Labour Force Survey – it measures jobs rather than workers, and some people will work more than one job – it has proven to be a reasonable guide on a quarterly basis. Notably, our forecast of 0.6% employment growth is actually to the low side of what the tax data would suggest.
One curiosity to this data is the question of where these workers have come from. The closure of the border over the last couple of years has meant a regular and key source of workers has been absent. Indeed, the working-age population has barely grown at all over this period. In addition, Jobseeker benefit numbers have been fairly flat, which suggests that not many of these additional workers have come out of the ranks of the unemployed. The tax data does, however, point to one group flooding into the labour market. In fact, over the past year, 40% of the growth in jobs has been among teenagers.
Altogether, this suggests to us that the lift in employment will be largely matched by a rise in the labour force participation rate, and as such the fall in the unemployment rate is likely to be modest. Participation has been high but choppy over the last several quarters, with a tug-of-war between rising youth participation and a growing share of the population hitting retirement age. That said, it pays to remember that any fall in the unemployment rate will see the rate either match or surpass the previous record low.
Digging into wage pressures a little more, we’ve assumed a 1% rise in the LCI for the September quarter. That follows a 1.1% rise in the June quarter (including a 1.3% rise in private sector wages), which was boosted by the 6% increase in the minimum wage for this year. On an annual basis, our forecast implies a further acceleration in labour costs, and we think that these costs will continue to run higher over the rest of the year and into next.
Similarly, the Quarterly Employment Survey measure of average hourly earnings (which more closely captures what workers are actually getting in hand) rose by 6.4% in the year to June, with a 7% rise in the private sector. We expect to see a further acceleration in this measure for September as well.
The tight labour market and surging wages is one factor leading to economic pessimism amongst New Zealand businesses. Indeed, last week’s ANZ business survey for October showed that a net 43% of businesses now expect that economic conditions will weaken over the coming year. That’s a deterioration from the already weak level that we saw in September.
The majority of businesses also expect that trading conditions on their own shop floors will remain subdued over the coming months. That pessimism is widespread across sectors.
The low level of confidence among New Zealand businesses isn’t a surprise. While spending levels in the economy have held up, businesses are grappling with a range of challenges, including rising interest costs and the aforementioned ongoing shortages of staff. At the same time, wider operating costs have been charging higher, squeezing margins for many firms.
On the cost front, nearly 90% of businesses expect their operating costs will rise over the next few months, and 65% of them are planning on raising their prices. Both of those figures have eased back a little from their recent highs, but they still point to red-hot inflation pressures.
All up, weak business sentiment and the prospect of a red-hot labour market read next week are reinforcing that inflation pressures remain intense. Moreover, we’re not seeing any material signs that they have started to abate despite the large rise in borrowing costs over the past year. With that in mind, we expect the RBNZ to match these intense pressures with a jumbo-sized 75bp OCR hike at its upcoming November policy meeting.
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