NZ labour market review, December quarter 2022
The December quarter labour market surveys were strong, if a touch softer than expected. With higher interest rates now weighing on the economy, we think the jobs market has reached a turning point.
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Turning point?
- The unemployment rate rose to 3.4%, slightly higher than forecast.
- While the jobs market is coming from a very strong starting point, there is good reason to expect a deterioration in the years ahead.
- In contrast, wage inflation remains on the rise, and the turning point is likely to come later.
- We continue to expect a 0.5% increase in the Official Cash Rate later this month.
Today’s labour market surveys for the December quarter came in largely in line with expectations – fractionally on the softer side, but nothing to change the overall picture. The jobs market remains tight for now, and wage growth is doing its usual catch-up with the broader economic cycle. But with borrowers now starting to really feel the bite of higher interest rates, there’s good reason to expect a turnaround in labour market conditions over the next year as the economy slows.
This was one of the last major data releases ahead of the Reserve Bank’s next Monetary Policy Statement. Its November forecasts were already braced for some strong results for the December quarter, with the unemployment rate dipping to 3.2% and wage growth continuing to accelerate. Beyond that, though, the RBNZ was looking for a rapid deterioration in the labour market, with unemployment rising to 4.8% by the end of this year alone. In that light, today’s results were right in line with the RBNZ’s broader view. At most, you could argue that the labour market has reached the turning point a few months earlier than they assumed.
Our forecast remains for a 50 basis point increase in the OCR at the February review. We had already shaded this down from a 75 basis point hike after last week’s inflation figures, and today’s labour market numbers leave us comfortable with our decision. That assessment seems to be shared more widely, with financial market pricing moving more firmly towards a 50bp increase.
Details.
The unemployment rate ticked up slightly to 3.4% in the December quarter. That was against our forecast of a flat outturn of 3.3%, though there wasn’t a lot in it (the unrounded result was 3.35%). The details were also very similar to what we expected, with employment rising by a modest 0.2% and the participation rate holding at a record high of 71.7%.
This marks a year and a half where the unemployment rate has held in the low 3’s – as good an indicator as any that the economy has hit the wall in terms of full capacity. Bear in mind that ‘full employment’ will never mean zero unemployment: there are always people in between jobs at any point in time. It often takes some time to match workers up with new employers, but most of them do indeed find their way back into the workforce – only a small share of unemployment is long- term.
Wage growth is typically a lagging element of the economic cycle, and that has proven to be the case this time – despite the mounting evidence of a tight labour market and rising inflation pressures over 2021, wage growth didn’t really start to pick up until 2022. But once it took off, it really took off, with both of the major wage measures reaching the highest levels in the history of their respective surveys.
The Labour Cost Index (LCI) rose 1.1% for the quarter, lifting the annual growth rate to 4.1%. That was largely in line with both our forecasts and the RBNZ’s, though again a touch on the lower side.
The Quarterly Employment Survey (QES) measure of average hourly earnings was more of a surprise, rising by just 0.9% in the December quarter. That followed two consecutive quarters of more than 2% growth. However, this measure is much more volatile than the LCI, so we don’t put a lot of stock in our ability to forecast it anyway. Plus, the large and growing divergence between the two measures was already something of a puzzle, so the latest figures go some way towards reconciling them (but not completely).
If we’re assessing the degree of surprise in the wage figures, we should also note that the RBNZ’s forecasts are based on ordinary time pay rates for the private sector. As it happens, this measure misses quite a bit of what was going on in the December quarter: public sector wages are now accelerating as they play catch-up to the private sector, and overtime pay rates have surged.
Looking ahead, we expect the unemployment rate to rise gradually over the next couple of years, as higher interest rates take the heat out of the New Zealand economy. However, our forecast is less dramatic than the RBNZ’s – peaking at 4.8% compared to 5.7% – reflecting our view that the recession will be a shallow one.
Given the typical lag, we suspect that wage growth has a few quarters to go before it reaches its peak. That in turn means that consumer price inflation is likely to stay stubbornly above the RBNZ’s target in the year ahead, with local price pressures remaining strong even as the effects of international price shocks start to recede.
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