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NZ unemployment falls: Still expect further RBNZ hikes

New Zealand's unemployment falls: Still expect further RBNZ hikes

New Zealand's labour market continues to tighten, consistent with a pick-up in growth. Although Q2 jobs growth surprised on the downside, at +3.7% y-o-y (market had +4.0%), the unemployment rate fell from 5.9% to 5.6% in Q2 (market expected 5.8%). Strong labour demand has so far been met with a good supply of workers, particularly from overseas, which has kept wages well contained. While wages growth remained relatively subdued, with the labour cost index rising at +1.7% y-o-y in Q2 (in line with expectations), we expect wages growth is likely to gradually lift in coming quarters as the unemployment rate falls. We still expect another RBNZ rate hike before year-end.

Facts
- The household labour force survey showed a modest +0.4% q-o-q lift in employment in Q2, with the annual increase remaining strong at +3.7% y-o-y (market had +4.0%). The participation rate fell from 69.2% (a record high) to 68.9%, which saw the unemployment rate to fall from 5.9% to 5.6% (market had 5.8%).

- The quarterly employment survey showed a +2.3% y-o-y increase in filled jobs, and a +3.5% y-o-y rise in full-time equivalent employees.

- The labour cost index rose by +0.5% q-o-q in Q2, in line with expectations. The annual increase in labour costs stood at +1.7% y-o-y (in line with market expectations).

Implications
New Zealand's labour market continues to tighten, albeit fairly gradually. Employment growth over the past year has been strong, at +3.7% y-o-y. Overall employment gains slowed down somewhat in Q2, but this partly masks a shift from part-time to full-time jobs. Full-time employment rose +0.9% q-o-q, while part-time jobs fell by -0.4% q-o-q.

Despite the clear improvement in labour market conditions over the past year, wages pressure has remained well contained. New Zealand’s population growth has accelerated thanks to strong net migration inflows and, at the same time, the participation rate has recently been around record high levels. The supply of workers has, so far, been adequate to meet the needs of the booming economy, with the unemployment rate declining only slowly. However, with the unemployment rate continuing to fall, we expect wages growth to pick up in coming quarters.

Continued improvement in labour market conditions is consistent with broad-based growth in New Zealand’s economy. With overall growth still tracking above potential, we expect inflation to lift over the coming year. The RBNZ’s own wage forecasts are fairly benign, so today’s data are unlikely to alter their outlook greatly. We remain of the view that the RBNZ will be on hold for now, but still expect a further lift in the cash rate before year-end.

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