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NZ employment strong: domestic boom boosts labour market

New Zealand's employment strong: domestic boom boosts labour market


New Zealand’s labour market tightened further in Q4. The unemployment rate fell to 6.0% (in line with market expectations), while employment growth rose by a strong +3.0% y-o-y (market had +2.4%). New Zealand's economy is beginning to boom and this has boosted hiring and labour force participation. Wage inflation picked up slightly, although it is still low. With demand picking up strongly and broader cost pressures forecast to rise we expect the RBNZ to begin lifting rates in March.

Facts
- The household labour force survey showed that the unemployment rate fell to 6.0% in Q4 (market had 6.0%, HSBC had 5.9%), from 6.2% in Q3. Employment growth was +1.1% in Q4 (market expected +0.6%, HSBC had +0.9%), although total hours worked fell -0.3% q-o-q. The participation rate increased to 68.9% (market had expected 68.6%).

- The quarterly employment survey (QES) showed full time equivalent employment growth of +0.2% q-o-q and growth in paid hours of +0.3% q-o-q.

- The labour cost index of wages (private sector ex-overtime) was up +0.6% in Q4 (market had +0.5%), to be +1.7% y-o-y.

Implications
New Zealand’s economy is beginning to boom and today’s figures show that this had continued to feed through to the labour market in Q4. The Canterbury rebuild, strong commodity and housing prices and low policy rates are providing a significant boost to activity and firms are increasing their workforce in response.

At the same time, stronger job prospects have encouraged more people to seek work, with New Zealand’s participation rate now at the highest level since 2008. Despite stronger participation, hiring has been more than enough to absorb new flows into the market, with the unemployment rate dropping further.

Wage inflation is yet to pick up significantly, with wage increases still below average levels. However, as the labour market continues to tighten, and broader cost pressures continue to rise we expect wage rates to follow suit. In addition, the strong pick-up in employment growth has been enough to deliver strong growth in total labour incomes. Total gross earnings have risen +5.2% y-o-y, which should provide support for further growth in consumer spending.

Today’s figures are likely to sit in line with the RBNZ’s expectations. The central bank was forecasting an unemployment rate of 6.0%, while a modest pick-up in wage inflation was likely expected, given the central bank’s assessment of broader capacity pressure. Overall, with demand picking up strongly and broader cost pressures building we expect the central bank will soon need to raise interest rates to keep inflation contained, and expect a hike in March.

Bottom line

New Zealand’s labour market improved further in Q4, as the strong domestic economy provided a boost to hiring and improved job prospects encouraged more people into the labour force.

Wage inflation is yet to pick up significantly, although a tightening labour market and a broader rise in cost pressure should provide support in coming quarters.

Today’s figures likely sit in line with the RBNZ’s expectations, and with demand strengthening and inflation pressure beginning to build we expect the RBNZ to hike rates in March.

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