Wages in New Zealand grew slowest in years

Wages in New Zealand grew at slowest rate in nine years in 1Q

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Private sector wage growth remained subdued in New Zealand in the March quarter. The private sector labour cost index (LCI), which of the various wage measures receives most attention from the RBNZ, rose 0.3%q/q in 1Q (J.P. Morgan: 0.3%, consensus: 0.4%), remaining unchanged from the previous three months. From a year earlier, private sector wages increased 1.3%oya, marking the slowest growth rate in nine years; public sector wages were up 2.3%.

Looking at industries, non-metallic mineral product manufacturing and transport equipment, machinery, and equipment manufacturing posted the largest increases, both rising 0.6%q/q. From a year earlier, the biggest increases in wages were recorded in education (+3.2%oya), resulting from collective employment agreements coming into effect, and health and community services (+2.6%)
It appears, however, that the recent period of decline in demand for labour has passed. The Quarterly Employment Survey (QES), also released today, showed that filled jobs remained steady after five consecutive quarters of decline; this supports our view that the upcoming employment report will show a small rise in employment. The QES also showed that total paid hours fell 0.1%oya and average total hourly earnings increased 2.1%. The QES earnings data reflect changes in pay rates, along with compositional and other changes across the workforce, whereas the LCI measures changes in salary and wage rates for a fixed quantity and quality of labour input.
The market is now focused on the employment report on Thursday. We expect that the unemployment rate probably remained steady at a 10-year high of 7.3% in 1Q but, as previously mentioned, the number of employed persons likely increased, rising 0.2%q/q on our forecasts.

We suspect, however, that we have seen the low point in the Kiwi employment cycle, but acknowledge that any improvement in the labour market will be gradual. The NZIER quarterly surveys have showed that hiring intentions have been marginally positive in recent quarters, which is good news, but actual hiring is still below long-run averages. With corporate profitability having fallen in 1Q, any significant pickup in new hiring may be delayed.

Indeed, weak labour market conditions and excess capacity in the labour market, which will keep wage inflation under control, will allow the RBNZ some wriggle room. Our forecast remains that the RBNZ will kick off the next tightening cycle in July with a 25bp hike. Governor Bollard last week dropped the explicit reference to the planned removal of policy stimulus “around the middle of 2010.” Official guidance now suggests that the stimulus may be removed “in coming months.” This we interpret as either June or July, but the risks, we believe, are skewed toward a July move. By then, the RBNZ will have the first quarter GDP print, which should provide Bollard with hard evidence that the recovery underway is sustainable. After the solid 0.8%q/q result in 4Q09, our forecast is for GDP growth of 0.8% again in 1Q.

ENDS

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