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Household Labour Force Survey

Data Flash (New Zealand) Household Labour Force Survey

Q2 2000 Key Points Employment fell 0.2% qoq in Q2 following a decline of 0.3% qoq in Q1. Average market expectations had been for a rise of 0.2%. The weak overall result was driven by a large fall in employment in the Auckland region, consistent with evidence from other regional economic indicators.

The fall in overall employment stemmed from a 0.6% fall in full-time employment. Part-time employment increased 0.8%. The fall in employment was driven largely by a decline in the wholesale and retail trade sector. community and personal sector. The number of total hours worked rose 0.1% qoq after falling 3.9% in Q1.

The extreme volatility of this data in recent quarters makes us sceptical about its usefulness as an indicator of economic activity. Despite the fall in employment, the unemployment rate fell to 6.1% in Q2 (from 6.4% in Q1) due to a sharp fall in labour force participation, from 65.3% to 64.8% - the lowest level recorded in over 5 years.

Market Reaction The short end rallied on the release of the data, which affirmed that the economy was weak during Q2. Current pricing implies around a two-thirds probability of a 25bp hike in 16 August or 4 October, followed by a 25bp hike at the 6 December Monetary Policy Statement.

Comment Today's HLFS represents the last major release before the RBNZ likely finalises the economic and inflation forecasts that will appear in its 16 August Monetary Policy Statement.

The outcome for employment was weaker than we were expecting. Taken at face value, the fall in employment is consistent with anecdotal evidence of employers adopting a more cautious approach to employment decisions in light of concerns about the Employment Relations Bill.

However, the HLFS result appears weaker than might be expected given recent trends in PAYE tax revenue (adjusted for tax rate changes). We have constructed an estimate of growth in household incomes based on HLFS hours worked and the QES wage data (including our forecast of growth in wages Q2). As the chart above shows, growth in PAYE tax revenue appears to be running at rates much stronger than suggested by the HLFS, casting doubt some doubt about the weakness seen in the HLFS data. The sample error at the 95% confidence level for total employment is approximately plus or minus 20,000, meaning that the estimated 4,000 reduction in employment during Q2 could easily overstate the degree of weakness in the labour market.

We will be looking for confirmation of the fall in employment when the Quarterly Employment Survey (QES) is released on 16 August. In Q1, the QES contradicted the weak HLFS and proved to be a better indicator of the 0.8% qoq growth in GDP. Based on indicators to hand, our forecast for Q2 GDP growth remains 0.2% qoq. The fall in the unemployment rate to 6.1% was due solely to a sharp fall in the participation rate. The fall in participation was very large by historical standards and may partially reflect sample error. However, the barrage of negative economic news over the last three months or so may also have discouraged some of the unemployed from actively seeking employment.

We doubt that the RBNZ will read much into the fall in the unemployment rate. We expect that participation will rebound somewhat in Q3, leading to a rise in the unemployment rate. Had the participation rate remained at the levels experienced in Q1, the unemployment rate would have printed at 6.8%.

On balance, we have decided to retain our call that the RBNZ will hike the OCR 25bps on 16 August, although the probabilities appear to be close to 50:50. We believe that the RBNZ will discount the current weak data and give significant weight to the much more positive outlook for the economy in 2001 and beyond. Nonetheless, tactical issues will play at least as great a role as economic issues. We remain more confident in our call that the OCR will be at least 25bps higher than at present following the 4 October Interim OCR Review.

Labour Market Data Employment Unemploy. HLFS qoq.% ann.% Rate (s.a.) Dec-98 +0.1 -0.7 7.7 Mar-99 +0.9 +0.5 7.2 Jun-99 +0.2 +1.2 7.0 Sep-99 +0.2 +1.4 6.8 Dec-99 +1.3 +2.7 6.3 Mar-00 -0.3 +1.4 6.4 Jun-00 -0.2 +1.0 6.1 Source: DB Global Markets Research, Statistics NZ

Darren Gibbs, Senior Economist, New Zealand, (64) 9 351-1376 Ulf Schoefisch, Chief Economist, New Zealand, (64) 9 351-1375

This, along with an extensive range of other publications, is available on our web site http://research.gm.db.com

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