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NZ employment booming, but RBNZ still wants lower NZD

New Zealand employment strong: Booming, but RBNZ still wants lower NZD

New Zealand’s labour market posted further improvement in Q1, with employment growth now running at a strong +3.7% y-o-y (market had +3.4%). The unemployment rate remained steady at 6.0% (market had 5.8%) reflecting a solid rise in participation. Overall, the economy is on track to post one of the strongest growth rates in the OECD this year. The labour market is improving in line with this story and we expect the central bank to hike rates further in June. However, the high NZD may mean fewer hikes than the RBNZ projected in March. In a speech today, the RBNZ’s governor reinforced their view that the NZD is seen as overvalued and raised the prospect of currency intervention.
- The household labour force survey showed that the unemployment rate remained steady at 6.0% in Q1 (market had 5.8%, HSBC had 5.7%). Employment growth was +0.9% in Q1 (market expected +0.6%, HSBC had +0.9%). In annual terms, employment rose by +3.7% y-o-y (market had +3.4%). The participation rate increased to 69.3%, from 68.9% in Q4.

- The quarterly employment survey (QES) showed full time equivalent employment growth of +1.1% q-o-q and growth in paid hours of +1.5% q-o-q.

- The labour cost index of wages (private sector ex-overtime) was up +0.3% in Q1 (market had +0.5%), to be +1.6% y-o-y.

- The RBNZ governor also delivered a speech this morning, discussing prospects for the dairy sector. On the NZD, the governor noted ‘the Reserve Bank considers that the exchange rate is overvalued and does not believe its current level is sustainable’. He also said that ‘if the currency remains high in the face of worsening fundamentals, such as a continued weakening in export prices, it would become more opportune for the Reserve Bank to intervene in the currency market to sell NZ dollars’.

New Zealand’s economy continues to pick up strongly and this is providing an on-going boost to hiring. Post-earthquake reconstruction, rising house prices, increased consumer spending and, until recently, very strong export prices have provided a significant boost to activity, and firms are increasing their workforce in response. Employment rose by a strong +3.7% y-o-y in Q1.

At the same time, an improving labour market is encouraging more people to enter the workforce, with New Zealand’s participation rate picking up further in Q1 to a new record high. This pick-up was enough to see the unemployment rate remain steady at 6.0%. This has helped keep pressure off wage inflation, which remains contained, for now.

Looking ahead, it is unlikely that the participation rate will continue to rise from its very high level. We expect strong growth to encourage an ongoing pick-up in employment and the subsequent tightening in the labour market to start to boost wage inflation in coming quarters.

Overall, today’s data were likely to be a little weaker than the RBNZ was expecting. The central bank was forecasting an unemployment rate of 5.6% in Q1. More broadly, the economy remains on track to post one of the strongest growth rates in the OECD this year and we continue to expect the central bank to hike rates further in June, to keep medium-term inflation in check.

However, we expect that rates may not be lifted as much as the RBNZ were projecting in March, largely because the NZD remains very high – we expect a further 50 basis points of hikes in 2014.

In a speech today, the RBNZ Governor flagged continued concern over NZD strength and raised the prospects of currency intervention from the central bank.

The RBNZ has four criteria to assess the suitability of currency intervention, that: the currency is exceptionally high or low; it is unjustified by fundamentals; intervention is consistent with the policy targets agreement; and, conditions in markets must be opportune and allow intervention a reasonable chance of success.

It is likely the first two criteria are currently being met and further falls in export prices could now present a further opportunity for intervention to be effective should the NZD remain stubbornly high.

However, in our view, a question mark remains over the third condition – whether intervention is consistent with the policy targets agreement. The RBNZ has already embarked on a process of raising interest rates to keep the domestic boom in check. A high currency is helping manage this boom, keeping overall inflation pressures contained. Even with the recent solid fall in dairy prices, New Zealand’s economic prospects remain bright – and a lower currency could make managing inflation more difficult.

That said, today’s comments from the RBNZ Governor increase the chances that the RBNZ may intervene in 2014.


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