Moving in the right direction

Moving in the right direction

March 2018 quarter Labour Market Review
Key Points
• Another strong labour market report, with the unemployment rate falling to 4.4% - a nine-year low.
• Employment growth was solid, posting a respectable 3.1% yoy lift in line with our forecast.
• However, wage growth surprised a little as shown by the LCI rising only 0.3% qoq – slightly short of the broad market consensus of a 0.4% qoq rise.
• The RBNZ is likely to take comfort in today’s employment figures that it’s meeting one of its two monetary policy mandates, but disappointing wage growth is unlikely to have gone unnoticed.
• We still expect wage growth will pick up over 2018, albeit gradually, due to the tightening labour market, the minimum wage hike, and rising inflation.
• For now, the RBNZ is likely to be patient until its happy inflation is well on its way to the 2% target midpoint before hiking the OCR, in our view around mid-2019.

Summary

NZ’s economy continues to generate jobs to accommodate a growing population, but wages are only inching higher despite a tightening labour market. This has been the story of NZ’s labour market for a while now, a theme that was repeated in the March quarter according to Stats NZ’s suite of labour market surveys (including the Household Labour Force Survey (HLFS), Quarterly Employment Survey (QES), and the Labour Cost Index (LCI)). The unemployment rate eased to 4.4% - a nine year low – slightly below our pick of 4.5%. Importantly, there was a wider sense of labour market strength within the figures with the underutilisation rate (a broader measure of capacity in the labour market) also falling to 11.9%. Employment growth came in at 0.6% in the quarter, on par with the growth in the working age population, taking annual employment growth to 3.1% yoy. However, a fall in the labour force participation rate to 70.8%, still elevated by NZ standards, helped direct the unemployment rate lower. Not all the data presented were a sign of strength, the QES’s measure of total weekly paid hours, a loose proxy for GDP growth, increased a slight 0.1% qoq to take the annual rate down to 2.0% yoy.

Today’s figures showed surprise weakness in wage growth, the private sector LCI came in at 0.3% qoq below the consensus forecast of 0.4% qoq, and kept annual wage growth unchanged at 1.9% yoy. Last year’s Care and Support Workers Pay Equity Settlement continued to prop up annual wage growth, and StatsNZ noted annual wage growth would have come in at 1.6% yoy excluding the pay deal.

Today’s labour market report is likely to give the RBNZ comfort that its new employment mandate is being met. However, the paltry 0.3% qoq rise in the LCI still shows that the Bank has work to do on the inflation front. In our view we expect the Bank to keep the OCR unchanged at 1.75% until May next year.
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