Household Labour Force Survey- Q1 2000

Data Flash (New Zealand)

Household Labour Force Survey- Q1 2000

Key Points

Headline data overstates the weakness in the Q1 outturn.

Employment fell 0.4% qoq in Q1 following growth of 1.4% qoq in Q4. Average market expectations had been for a rise of 0.5%. Employment rose 1.4% yoy.

The fall in employment was due solely to a 2.4% fall in part-time employment. This followed a rise of 2.8% in Q4.

Full-time employment rose 0.4% qoq and 3.3% yoy. This result was in keeping with recent QSBO surveys pointing to positive employment intentions.

The fall in employment was driven largely by a decline in the community and personal sector. This sector had recorded very strong growth in Q4. Strong employment growth was recorded in the wholesale/retail trade sector and, somewhat surprisingly, in the construction sector.

The number of total hours worked fell 4.4% qoq after rising 4.1% qoq in Q4. The extreme volatility of this data limits its usefulness as an indicator of economic activity.

The unemployment rate rose marginally to 6.4% from 6.3%. The market and Reserve Bank had expected the employment rate to fall to 6.1%.

The rise in the unemployment rate was constrained by a fall in the labour market participation rate from a revised 65.5 to 65.3.

Comment

As we suggested following the release of the previous HLFS, the unexpectedly high 1.4% qoq gain in employment in Q4 pointed to a risk of a rather modest increase in Q1/2000. Today's data realised that risk with employment falling 0.3% qoq. This fall reflects the unwinding of gains made in part-time employment during Q4.

The volatility in part-time employment over recent quarters raises questions about its underlying trend. A further rebound in part-time employment in Q2 is not beyond the realms off possibility.

In our view a more accurate interpretation of recent trends can be obtained by looking at the Q4 and Q1 outturns together. This suggests growth in employment of around 0.5%, on average, over the past two quarters.

Focusing on the full-time component of employment leads to a similar conclusion. Continued growth in full-time employment in Q1 is a sign of positive levels of employer confidence and reflects high levels of capacity utilisation as a result of extremely strong growth in the second half of 1999.

The RBNZ, in its March forecasts, expected an unemployment rate of 6.1%. The higher rate of unemployment indicated by today's data implies marginally less pressure on inflation from constraints in the labour market than previously believed.

However, the labour market still remains tight by recent historical standards. Survey indicators confirm that employers are increasingly finding it difficult to employee skilled labour. This suggests that the trough in wage growth is likely to have been reached.

The last cycle showed that wage inflation appears to rise in New Zealand once unemployment falls below 7%. Wage inflation accelerated to 4% when the unemployment rate last reached 6.0%. Our forecasts see unemployment falling below 6%.

Next week's Q1 Quarterly Employment Survey and Labour Cost Index will provide evidence of the extent to which tight labour market conditions are beginning to feed into wage growth.

At this stage we estimate that GDP grew by 0.6% in Q1, down from the extreme rates of growth recorded in the second half of 1999. This translates to 5.2% growth yoy. Next week's retail trade will help us to refine our estimate. The Overseas Trade Indicies in June will also be important given uncertainty about the price/volume split underpinning recent strong rates of growth in both exports and imports.

Given growth in employment and hours worked of 1.4% yoy and 0.1% yoy respectively, on the face of it the data suggests strong productivity growth over the past year. However, as noted, recent part-time employment and hours worked data has been very volatile. Comparing output growth with growth in full-time employment suggests a more modest rate of growth in productivity.

We continue to expect the Reserve Bank to raise the Official Cash Rate by 50bps on 17 May. This tightening is necessary to move monetary conditions closer to a more neutral level. Although recent data confirms our view that growth has moderated over Q1, indicators of inflation continue to flash red, reflecting growth in commodity prices, the weak NZD, the closure of the output gap, and growing skill shortages in the labour market. Our forecasts see inflation rising above 2% later this year and remaining there over the following two years. Such an outcome would not be acceptable to the RBNZ.

Looking further ahead, there is scope for debate about the timing of further interest rate movements over the remainder of this year. At this stage we are sticking with our call of a further 50bps hike at the time of the 16 August Monetary Policy Statement (MPS). However, the possibility remains of a 25bp hike at the 5 July interim OCR review followed by a 25bp hike at the August MPS. Such a path has increasingly been priced into markets in recent days.

Labour Market Data
HLFS (s.a.)::::::::::::::: Employment::::::::::::::: Unemploy.Rate
:::::::::::::::::::: qoq. %:::::::::: ann. %:::::::::::::::
:::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::
Sep-98:::::::::::::::+0.1::::::::::::::: -0.7::::::::::::::: 7.4
Dec-98:::::::::::::::+0.1::::::::::::::: -0.7::::::::::::::: 7.7
Mar-99:::::::::::::::+1.0::::::::::::::: +0.5::::::::::::::: 7.2
Jun-99:::::::::::::::+0.1::::::::::::::: +1.2::::::::::::::: 7.0
Sep-99:::::::::::::::+0.3::::::::::::::: +1.4::::::::::::::: 6.8
Dec-99:::::::::::::::+1.4::::::::::::::: +2.7::::::::::::::: 6.3
Mar-00:::::::::::::::-0.3::::::::::::::: +1.4::::::::::::::: 6.4
Source: DB Global Markets Research, Statistics NZ

Darren Gibbs, Senior Economist, New Zealand

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