New Zealand's economy "appears to be hitting the wall" in terms of employment growth, according to Westpac economists.
In Westpac's Weekly Economic Commentary, acting chief economist Michael Gordon said a "downside surprise" in the latest labour market figures was the fact that in the June quarter 2022 there was zero employment growth for the third quarter in a row.
"That was accompanied by a further drop in the labour force participation rate. This illustrates another tension in the New Zealand labour market – with the migration tap having been largely turned off in recent times, the prime working-age population is ageing and shrinking. All of the growth has been in the over-65s, who have a much lower participation rate (although high by world standards)."
So, as a result, the NZ economy appears to be hitting that wall on employment growth. Gordon said that might seem strange when we still have more than 90,000 people actively looking for work, and we know that businesses across the board are "crying out" for more workers.
The unemployment rate rose slightly to 3.3% in the June quarter, up from the record low figure of 3.2% in both the December 2021 and March 2022 quarters.
"The reality is that even in a booming economy, there will always be some level of unemployment at any point in time," Gordon says.
"This may be people who are between jobs and are in the process of searching, or it may be people who have the wrong skills or are in the wrong location relative to where the demand is. The structure and regulation of the labour market can greatly affect where that baseline level of unemployment lies, but even in the best circumstances it’s going to be some way above zero.
"It may be that New Zealand is finding where that floor lies. While there is a great deal of hiring going on, employers are tending to attract people from the existing pool of workers, with no net growth in the number of jobs. Instead, all of the heat in the labour market is coming through in pay rates."
ANZ economists also see the job market having effectively hit a stalemate. In their latest NZ Weekly Data Wrap the ANZ economists say it’s looking like the domestic labour market has "simply reached the limits of its ability to match job seekers with vacant positions" (eg due to skills or geographical mismatches).
"For hiring managers, this means it will likely remain incredibly challenging to find staff – but that may not be reflected in the headline unemployment figure," they say.
While the headline labour market numbers may have been "a tad disappointing" relative to expectations (albeit still extremely solid in absolute terms), wages "blew everyone’s forecasts out of the water", the ANZ economists say.
"Private sector average hourly earnings growth rose a whopping 7.0% [year-on-year] – far higher than the 5.6% print the RBNZ expected. So we find ourselves giving a ‘hawkish surprise’ label to a labour market report where unemployment came in 0.5 [percentage points] above our expectation.
"In a very short period of time wage growth has accelerated to almost catch up with CPI inflation (currently running at 7.3%). And it’s very likely that private sector wage growth will be running ahead of inflation in the September quarter (ie right now)," the ANZ economists say.
Westpac's Gordon said the details of the pay data showed that pay increases are becoming more widespread. Two-thirds of all jobs received a pay increase in the last year, the highest proportion going back to 1991.
"It’s also worth noting the reasons that employers cite for giving pay rises. Cost of living adjustments are no more or less common than usual. Instead, the lift in wages has increasingly been around the need to match market rates and retain staff. In other words, wage inflation has been due to the demand-pull of intense competition for a fixed pool of workers, not the cost-push of rising living costs."
Gordon said on balance, the labour market data suggests "that demand-side forces are playing an even stronger role in inflation than we thought". And that in turn implies that more of the burden of adjustment lies with the Reserve Bank.
The Westpac economists have revised their forecasts and now expect a peak in the Official Cash rate in this cycle of 4%, up from their previous pick of 3.5%. ANZ economists also think the OCR will peak at 4% before the end of this year.
"Curiously, this means that we’ve traded places with financial markets, which not that long ago had been pricing in a peak OCR of more than 4%," Gordon said.
"However, recession concerns have dominated global markets in recent weeks, driving market interest rates sharply lower, and the New Zealand market has followed along. The market is now pricing a peak OCR of around 3.75% by the end of this year, turning to rate cuts from August next year.
"We think that’s far too early for the RBNZ to be turning tail, when the inflation challenge that it faces is coming increasingly from more persistent sources."
The ANZ economists say surging wages sound like great news for working Kiwis and are undoubtedly a relief for households who have been watching their real purchasing power fall.
"But if you’re a central bank with a 1-3% inflation target, while core inflation measures are 5-6%, this report is deeply concerning. Rapidly rising wages (not backed by higher productivity) only reinforce the risk of a wage price spiral. It’s clear that with labour demand still insatiable, high inflation is being incorporated into wage and price-setting behaviour.
"The fact is, higher wages are taking the edge off the squeeze that current mortgage rates are delivering – and the RBNZ is on a mission to squeeze households. We continue to expect the OCR will reach 4% by year-end.
"But the 'neutral' OCR is clearly lifting as the economy inflates (in 2006, with similar household debt/income levels and much lower CPI and wage inflation, the RBNZ’s estimate of neutral was low-5%s!).
"Accordingly, the risk is clearly that 4% may not be the end of it for the OCR, for all that we fully expect momentum to turn soggy by year-end," the ANZ economists say.
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