Weekly Economic Commentary 3 July 2023
Analysis and forecasts of the economy and markets, along with previews of data for the week ahead.
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Cooling, but not cracking.
Recent indicators show that the previously red-hot labour market is cooling off a bit. That’s to be expected in the wake of a sharp tightening in monetary policy over the last year and a half. But what remains to be seen is whether it’s slowing by enough to be consistent with a return to low and stable inflation.
Firstly, the Westpac-McDermott Miller Employment Confidence Index shows that New Zealanders remain optimistic on balance about the state of the labour market, in contrast to the slump in consumer confidence over the last year or so. However, the index eased by 3.9 points to 105.6 in the June quarter, which was the lowest reading since June 2021.
The biggest contributor to the fall in confidence was perceptions about current job opportunities, down by 11 points to a net 14.6. This measure has traditionally given a good steer on the near-term direction of the unemployment rate (though less so since the Covid-19 shock). The latest reading is consistent with a modest rise in unemployment over the next couple of quarters, from its still-low current level of 3.4%.
Perceptions about the availability of jobs may reflect the fact that inflows of migrant workers have resumed in full force since New Zealand reopened its border last year. Migrants normally have a mixed impact on the labour market – filling in skill shortages in some areas, but also adding to the overall level of demand in the economy. But it appears that, at least for now, migrants are seen as adding more to the supply side on balance, helping to address some of the distortions that had arisen during the border closure.
There does also seem to have been a genuine softening in the demand for workers, compared to what it once was. Online job advertisements fell by about 4% in May compared to April, and were down about 20% from the peaks they reached a year ago. These figures are not weak by any means – they’re still running above their pre-Covid levels. But we’ve now unwound the surge in ads that we saw in 2021 and 2022, which reflected a high level of churn as employers scrambled to attract more workers from a largely static population.
The ANZ business opinion survey also suggests that businesses remain a little reticent about hiring. Overall confidence about their own prospects has actually improved in recent months, with the balance turning (slightly) positive in June for the first time in more than a year. But while conditions have been looking brighter on several fronts – cost pressures are easing, access to credit is improving, expected profits are rising – employment intentions remain slightly negative, and have hardly budged so far this year.
Finally, the weekly figures on Jobseeker Benefit recipients have clearly turned a corner. After steadily declining over 2021 and 2022, they have flattened off in recent months and are now a touch higher than they were a year ago. We need to be careful about how to interpret these figures – the criteria for receiving the benefit are quite different from the official definition of unemployment (a study by Stats NZ found that the overlap is only about one-third). So they’re better used for identifying broad trends and turning points, rather than making specific forecasts.
On a more positive note, the Monthly Employment Indicator (MEI) showed a 0.2% rise in the number of filled jobs in May. The MEI is drawn from income tax data, making it quite a comprehensive record of the number of people in work, and far less prone to the volatility that we would see in a household or business survey. While the May increase was smaller than we’ve seen in previous months, it still points to a solid upward trend – up 3.7% on a year ago.
So where does that leave us in terms of a forecast for the unemployment rate? Technically it’s possible to have both rising employment and rising unemployment, within a fast-growing population. However, even with migrant inflows helping to boost population growth, the rate of jobs growth seems to be outpacing that. The other possible avenue is if more people are being brought into the active labour force. However, the participation rate was already at an all-time high of 72% in the March quarter, and it’s not clear where the scope lies to lift this rate even further.
We do expect a gradual rise in the unemployment rate over the rest of this year and beyond, as the economy continues to cool. However, the conditions for a substantial rise in unemployment don’t appear to be in place just yet.
In its May Monetary Policy Statement, the Reserve Bank was projecting only a slight rise in the unemployment rate to 3.5% for the June quarter, but then a rapid rise to 4.1% in the September quarter and 4.6% by year-end. That’s more akin to the pace of increase that we saw in 1998 or in 2009, when the New Zealand economy was deep into recession and employment was falling outright. It remains to be seen whether the gentler slowdown that we’re currently facing will be enough to fully break the back of inflation.
On a related note, both household and business surveys show that inflation expectations for the year ahead have eased substantially from their highs. There are undoubtedly some easy gains to be made in terms of bringing the headline inflation rate down, with shipping costs easing and many commodity prices lower than they were a year ago. The real test will be whether the ‘core’ components of inflation come down as readily – these are proving to be surprisingly stubborn in many parts of the world.
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