Weekly Economic Commentary 12 February 2024
Analysis and forecasts of the economy and markets, along with previews of data for the week ahead.
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Plenty to ponder
Last week’s labour market surveys will have left the Reserve Bank with some mixed feelings. Higher interest rates are cooling the New Zealand economy, and unemployment has continued to rise. But the process isn’t happening as fast as hoped, and wage growth remains much higher than what would be consistent with the 2% inflation target. These results, along with a string of data and events this week, will give markets a lot to ponder ahead of the next RBNZ policy statement.
The Household Labour Force Survey (HLFS) showed that the unemployment rate rose from 3.9% to 4.0% in the December quarter. From one perspective, that’s a substantial rise from the cycle low of 3.2% that was reached in early 2022. But it’s still a very low rate compared to history – equaling the low point reached in the pre-Covid years, when the labour market was clearly becoming tight.
The result was stronger than the increase to 4.2% that we and the Reserve Bank were forecasting. However, the reasons for the ‘miss’ were well within the normal range of outcomes. The number of people employed rose by 0.4%, slightly more than the 0.3% that we estimated, but much in line with the already-published Monthly Employment Indicator. At the same time, the labour force participation rate dipped slightly to 71.9%, with more teenagers and retirees exiting from the workforce altogether.
Employment is still growing at a reasonable clip, up 2.4% over the last year. But that’s been in the context of very strong population growth. Record net inward migration (almost 130,000 people over the last year) has boosted the working-age population by around 3% over that time. And a cooling economy means that jobs growth is not keeping pace with population growth.
The slower than expected rise in unemployment will be of some concern to the Reserve Bank. Unemployment is not a goal in and of itself, and as of late last year, the requirement to “support maximum sustainable employment” has been removed from the RBNZ’s mandate, leaving inflation as the sole focus. Even so, labour market measures are a useful real-time indicator of how hot the economy is running, and hence the likely degree of future inflation pressures.
The other unwelcome – and related – surprise for the RBNZ was that wage growth is not cooling as quickly as expected. That’s been partly exacerbated by some substantial pay agreements in health and education in the last two quarters, lifting public sector wage growth to 5.7% over the last year – the highest on record going back to 1994. Private sector wage growth has more clearly passed its peak, but it remains fairly robust: up 1.0% in the December quarter, and 3.9% on a year ago. That’s still a long way from what would be consistent with the RBNZ’s overall inflation target of 2%.
We shouldn’t lose sight of the fact that monetary policy is working; the economy is cooling, and inflation will continue to track down towards the target range. The concern for the RBNZ is whether it will get there within a reasonable timeframe. For the last year or so, the RBNZ has been consistently forecasting inflation to drop below 3% in the September quarter of 2024 – a date that is no longer all that far away.
The labour market figures on their own are unlikely to spur the RBNZ to a fresh round of interest rate hikes – and they will need to be balanced against softer-than-expected GDP and inflation outturns since the November Monetary Policy Statement. We think this data vindicates the stance we have had for a while that the OCR will remain unchanged in 2024. It’s plausible, though, that the RBNZ continues to express its previous concern that an interest rate increase could come in the next six months if core inflation pressures don’t adequately recede. The 28 February Statement would be an ideal platform to lay out the case for that move.
The other economic update of note last week was a further rise in prices at the GlobalDairyTrade auction, with the key product of whole milk powder up by 3.4%. The rebound in dairy prices over recent months has been something of a surprise, given the range of forces that seemed to be weighed against them. Chinese consumers remain on shaky ground, and fears that an El Niño-led drought could curtail milk production in New Zealand have now faded.
The rise in auction prices means that we have revised up our farmgate milk price forecast for this season from $7.50/kg to $7.90/kg, putting it towards the upper end of Fonterra’s most recent guidance of $7-8/kg. That would provide some relief to dairy farmers, though it’s hardly a bumper result. A sharp rise in on-farm costs in the last couple of years means that some farmers will still be operating below break-even for this season.
The week ahead.
The unusually long gap between policy reviews means that any communication from the RBNZ ahead of the February Statement will be eagerly followed by the market. This week there are two speaking opportunities. On Monday, senior RBNZ staff including Governor Orr will be appearing before Parliament’s Finance and Expenditure Committee; the sessions will cover the Financial Stability Report and the Annual Report that were released last year, but the discussion could range more widely.
Then on Friday, Governor Orr will be delivering a keynote speech at the University of Waikato Economic Forum. The brief for the speech indicates that it will be covering all of the RBNZ’s functions. But regarding monetary policy in particular, it refers to “the shift from transitory to more stubborn underlying inflation,” which hints that the RBNZ still sees inflation as a problem that needs to be actively managed.
There are several other noteworthy data releases throughout the week, including the survey of inflation expectations, the selected monthly price indices, card spending, house sales and migration – see our preview boxes for more detail. Some of these will be coming off some relatively weak results at the end of last year, so this week’s updates will shed some light on whether this reflected a Christmas-period lull, or a more sustained softening in the economy.
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