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Data Flash Household Labour Force Survey - Q1 2002

Data Flash (New Zealand) Household Labour Force Survey - Q1 2002

Comment

Today's Household Labour Force Survey confirmed that the demand for labour rose strongly in Q1, consistent with the result of last week's less widely followed Quarterly Employment Survey, and with our assessment that GDP growth has rebounded strongly in Q1 (our current expectation for Q1 GDP growth remains 1.3% qoq) after a lower than expected growth in Q4. In this sense, today's result merely confirms what we already thought to be the case.

Despite the rise in employment, the unemployment rate declined by just 0.1pp to 5.3 % - exactly in line with the RBNZ's March Monetary Policy Statement projections. The proportion of people classed as long-term unemployed has also continued to decline, consistent with our view that the structural unemployment rate is declining over time. Over the past two quarters, the labour force has grown dramatically, reflecting an influx of migrants and a rise in the participation rate to an all-time high. As a result, the economy's current sustainable growth rate is well-above its longer-term trend.

The RBNZ's medium-term policy view is driven by estimates of the output gap. Given uncertainty about both the existing output gap, and the rate at which sustainable output is growing, it is important to look at a range of other information to determine the extent of excess demand pressure and how that it is spilling over to inflation. In recent weeks, both private sector wages and CPI inflation have surprised on the downside, the latter showing little obvious pressure outside of the housing market.

However, on balance, it remains our interpretation that the economy is operating at or above its sustainable capacity and that inflation pressures would likely mount without some firming of monetary conditions. Therefore we think that a further increase in rates is appropriate, reinforcing the tightening of monetary conditions that has already occurred as a result of a stronger than expected appreciation of the NZD. We continue to expect the RBNZ to hike the official cash rate by 25bps on 15 May, in line with the path suggested by the March Monetary Policy Statement.

Tomorrow's March retail sales data will shed further light on the momentum of excess demand.

The likelihood of a 50bps hike will have been increased by today's data if the RBNZ chooses to focus solely on developments in labour demand rather than labour demand and supply together. We would not expect this to be the case, but clearly the possibility cannot be ruled out.

As discussed in previous notes, at present we think that a 50bps move is hard to justify given the Bank's March and April statements and our sense of the balance of domestic and international data since then (indeed, our own economic forecasts are little changed in aggregate from those we published back in February). While the increasingly hawkish make-up of the RBNZ's senior management raises the risk of inconsistency in the Bank's actions, we think this risk is offset by the political sensitivities surrounding the appointment of the next Governor. And, in our view, with questions being asked about the pace of the global recovery and of the outlook for New Zealand's rural sector, and with uncertainties regarding the impact of rate hikes on an increasingly indebted household sector, the RBNZ would be wise to take a circumspect approach as it tightens policy settings, thus allowing a proper assessment of the impact on consumer confidence and spending.

Key Points

Employment rose 1.3% qoq in Q1. This follows an increase of 0.9% qoq in Q4. The level of employment was 3.5% higher than a year earlier. This result was much stronger than market expectations of a 0.5% rise.

Full-time employment rose 1.0% qoq and was 2.1% higher than a year earlier. Part-time employment rose 3.3% qoq and was a mammoth 9.0% higher than a year earlier.

On a full-time-equivalent basis (one full-time worker equals two part-time workers) employment rose by 1.3% qoq.

On an industry basis, the education sector accounted for nearly two-thirds of the growth in Q1 and one-third of all growth over the last year. Indeed, the data suggest that the sector has grown by 15% over the past year. Although increasing numbers of foreign students, plus increased use of child-care, would account for a stronger than average rise, the sheer size of growth in this sector seems a little difficult to believe. Strong growth was also recorded in the retail and business and finance sectors. However, employment in the farming sector fell 3% qoq in Q1 (the first fall in two years) while the manufacturing sector was flat, both in quarterly and year-to-date terms.

The number of total hours worked rose 1.3% qoq in Q1 to be 2.2% higher than a year earlier. This outcome was in line with the QES measure of hours paid and our expectations.

Labour force growth has risen dramatically, helped by a rise in the participation rate to 66.9% (an all-time high) from 66.4% in Q4. This reflects a flood of new entrants into the labour force as a result of the recent strong growth in net inward migration as well as increasing numbers of current residents making themselves available for part-time employment.

As a result, despite robust growth in employment, the unemployment rate fell just 0.1pp to 5.3% from 5.4% in Q4. The proportion of the unemployed classed as "long-term unemployed" continues to decline, consistent with our view that the economy's structural unemployment rate is declining over time.

The RBNZ's March Monetary Policy Statement projections were based on 2.25% annual employment growth and a 5.25% unemployment rate (quarter point rounded).

Darren Gibbs, Senior Economist, New Zealand

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