Deal Or No Deal: Dealing With The Cards Trump Dealt

• Every indicator in the latest Kiwi unemployment report points to weakness. Employment barely grew, hours worked was down, and wage growth cooled. Youth are bearing the brunt (see COTW). It reinforces the need for further rate relief.
• In some good news, we got the first trade ‘deal’ out of the US last week. The UK was lucky first, and managed to negotiate down the tariffs on steel and autos. Other countries running a trade surplus with the US, however, may not get as good.
• Rents are falling. Because the stock of rental properties on the market keeps rising. Investors, unable to sell their investment property (at the price they want/need), are putting houses (back) up for rent. See the Special Topic for more.

Here’s our take on current events

The latest Kiwi labour market report speaks volumes to the state of our economy. Everything in the report showed scars of the recession.The unemployment rate was unchanged at 5.1%, below the RBNZ’s estimate of 5.2% and our forecast 5.3%. But the details of the report were weak, as expected. Workers may not be losing their jobs, but many are losing valuable hours. The underutilisation rate rose, even as unemployment remained steady. While the number of people with jobs, but not enough hours, rose again. And the trend was also highlighted in the fall in full time employment and rise in part time.

What matters more for the economic outlook, is the hours worked. Hours worked fell a hefty 2.9% over the year, and has been declining for 5 consecutive quarters. Declining hours is also being met with weaker wages. More and more workers are receiving smaller and smaller pay rises. For example, the number of workers receiving a pay rise above 2% but below 3% has been steadily increasing for 7 quarters. And the wage bill (private sector Labour Cost Index, seasonally adjusted) rose 2.5% over the year, down from 2.9%yoy last quarter and a peak of 4.5%. That’s indicative of a sharp recession. And so too is the drop in participation. The participation rate fell, again, to 70.8% from 70.9%. That’s a mighty fall from the 72.4% peak in mid-2023. Put simply, the labour market is not as attractive as it once was. As the demand for workers falls, would-be-workers give up and leave.

All indicators support our call for lower interest rates.

Demand for labour has clearly softened, and wage inflation is quickly cooling. We should have stimulatory monetary policy (not the current restrictive setting). We expect another 100bps of rate cuts to 2.5%. The uncertainty surrounding Trump’s tariffs demands caution as well.

Progress has finally been made on trade negotiations. Late last week, President Donald Trump and British Prime Minister Keir Starmer announced a trade agreement. Though light on details, and not formally signed, the general terms of the deal would see the US leaving it’s 10% baseline tariff on most UK goods. However, the 25% tariff on British steel is gone, and the tariff on British cars will fall from 27.5% to the baseline 10% - but just for the first 100k cars imported each year. Additionally, both countries have agreed to new reciprocal access on beef with UK farmers given a first-ever tariff-free quota for 13,000 metric tonnes.

Tariff de-escalation is the story many want to hear. That said, the UK deal should not be seen as the blueprint for future trade deals. The US is targeting countries in which the US runs a trade deficit. The US runs a trade surplus with the UK, which may explain their relative moderate concession. Trump may demand more from countries with which the US runs a trade deficit. It’s part of his desire to rebalance the US trade deficit, and generate revenue to lower taxes.

As for de-escalation between China and the US, we know talks are finally happening in Switzerland. But so far, the only news we have is that “substantial progress” is being made and that talks are “productive. We’ll keep watching… waiting… and waiting…

Chart of the Week: Last ones in, first ones out.

You know the labour market is tight, when you start to pull from the fringes of the market – youth and young adults. Conversely, when the labour market weakens, the younger workers typically bear the brunt of rising unemployment. We’re seeing this play out today. Total employment is around 21k lower than last year’s levels. And youth (15-19 years) and young adult (20-24 years) make up close to half of the decline. The youth unemployment rate has climbed to 23.9% - the highest since 2013. It also appears that these younger workers are exiting the market, as the participation rate falls to 50.2%. In a silver lining, some have returned to education. That’s good news for when they re-enter the market down the line. Despite this, there has still been an increase in the rate for those not in education, employment, or training (NEET). In the last 12 months, the youth NEET rate increased by 0.4%pts to 12.3% and the young adult NEET rate rose 1.9%pts to 16.6%. Like others disillusioned by the current economic environment, some may be waiting on the sidelines, hoping for better times.

The other alternative is to flock the nest entirely. The labour market across the Tasman is relatively stronger. The Aussie youth unemployment rate is a stark 9.9%pts below ours at 14%.

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