Data Flash Labour Costs And Employment (Q1 2002)
Data Flash (New Zealand) Labour Costs And Employment (Q1 2002)
Result: Average hourly earnings in the private sector rose by 0.6% qoq in Q1, which compared to market expectations of +1.0% and a RBNZ forecast of +1.3%. The Labour Cost Index, which we consider a measure of unit labour costs, rose by 0.5% qoq. Employment rose by 0.4 qoq (seas. adj.). Implication for markets: The weaker-than-expected wage result has further weakened the argument for a 50 bps rate hike by the RBNZ on 15 May, which caused the front bill contracts to rally 3 bps. We continue to forecast the RBNZ to raise the OCR by 25 bps at each of the next three meetings (15 May, 3 July, 14 August).
As Don Brash stated on Monday (three days after his resignation!), the RBNZ's internal debate is about a 25 or 50 bps rate hike on 15 May. In our view, following today's labour market data, it has become nearly impossible to mount a credible case for an acceleration of the pace of the interest rate tightening cycle at this point. In March Don Brash noted that one of the benefits of starting the tightening cycle early was that it would make it less likely that the Bank would have to resort to larger tightening steps later in the cycle. When lifting the OCR by 25 bps in April the Bank noted that the data up to that point had been generally as expected. What has happened since then that would justify stepping up the tightening pace? If anything, recent data have strengthened the argument for excercising caution:
Weaker-than-expected figures for the US economy have revived concerns about the medium-term pace of the global recovery process.
Domestically, consumer and business confidence surveys have shown some moderation in positive sentiment.
Fonterra has announced a larger-than-expected drop (minus 25%) in the dairy sector payout for the next season, which is due to start next month. In addition, today's labour market data have revealed some moderation in employment growth and a surprising lack of wage pressure, considering that the economy is operating close to full capacity. While the low wage figure may turn out to be an outlier, the risk of accelerating wage inflation appears to have diminished.
Furthermore, the faster-than-expected appreciation of the NZ dollar over recent weeks points to less upward pressure on costs over the medium term than projected by the RBNZ in March.
While inflation models naturally focus on the implications of private sector wage movements, it should not be forgotten that the average 7% wage increase in the public sector over the past year has been fuelling domestic demand. The buoyancy in the retail sector and housing market clearly suggest that the RBNZ will have to continue with its rate hike strategy in order to ensure that underlying inflation falls back below 2% over the course of the next 12-18 months. However, the above-mentioned moderating influences on economic activity and price pressure suggest that stepping up the pace of tightening on 15 May would be difficult to reconcile with the RBNZ's mandate of having to run policy in a way that avoids unnecessary volatility in output, interest and exchange rates. Acting Governor Rod Carr would be ill advised to deviate from the path of modest rate increases foreshadowed by Don Brash. Deutsche Bank expects the RBNZ to lift the OCR by 25 bps at each of the next three meetings (15 May, 3 July and 14 August), thereby taking the cash rate back to 6.0%. 5.75-6.00% is viewed as `neutral' by most commentators. Any further rate rises beyond that point will depend on the strength of the NZ dollar and the global economy. Our view remains that the OCR will peak at 6.5% in early 2003.
The data: wages
Private sector average hourly earnings (ordinary time) increased by 0.6% qoq in the March quarter, as measured by the Quarterly Employment Survey (QES). This result was weaker than market expectations of a 1.0% qoq rise and the RBNZ's forecast of 1.3%.
In seasonally adjusted terms, hourly earnings growth of 0.3% qoq was recorded, significantly weaker than the 0.7-0.8% range recorded over the previous three quarters.
Private sector average hourly earnings were 2.5% above last year's level. The rate of annual wage inflation peaked at 3.5% in mid-2001.
Average hourly earnings (ordinary time) in the public sector rose 3.1% qoq to be 7.3% higher than a year earlier. The high number reflects several `catch-up' wage settlements, following several years of zero adjustments.
The combined wage movement (ordinary time) in the private and public sectors was 1.2% qoq, taking the annual rate from 3.5% to 3.7%.
The alternate Labour Cost Index (LCI) reported a 0.5% qoq / 2.0% yoy increase in private sector wage rates (ordinary time) in Q1. Of the private sector salary and ordinary time wage rates that rose, the average increase was 3.7%. The LCI adjusts for the changing composition of the labour market and for productivity growth, and thus is best interpreted as a measure of unit labour costs.
The data: employment and hours paid
Adjusting for seasonal factors, the QES recorded a 0.4% qoq increase in filled jobs. Full-time equivalent employment rose 0.7% qoq in Q1 and was 3.6% higher than a year earlier.
Adjusting for seasonal factors, the QES recorded a 1.4% qoq increase in paid hours, lifting the annual increase from 3.2% to 4.7%. However, this result should be treated with caution. The widely preferred survey of employment and hours-worked trends, the Household Labour Force Survey (HLFS), will be released on 9 May. The two surveys regularly exhibit significant differences, particularly with respect to hours worked.
Ulf Schoefisch, Chief Economist, New Zealand