It will be all about looking beyond the 'headline news' when the latest labour market figures are released in the coming week.
And I say that because the headline news may not be what particularly the Reserve Bank wants to see. We might even see a new record low for unemployment of under 3.2%, when Stats NZ unveils the figures on Wednesday, February 1.
What people will be searching for will be signs that the amazingly hot jobs market is in any way starting to cool. Such signs may be fairly subtle - if they are there at all.
The labour market and what happens to it this year will be key in the Reserve Bank's battle to get inflation down.
The RBNZ, which has candidly conceded it is trying to create a recession in order to extinguish inflation, needs to see some slack appearing in the labour market in order for a slow down in spending to occur and for the economy, in turn to slow, thus reducing inflationary pressures.
I've said it before and will say it again - the labour market is THE most important thing at the moment in the battle to control inflation. Unless heat comes out of the jobs market then it's going to be extremely difficult to curb both the inflation rate and its ugly partner in crime - inflation expectations.
The sheer strength of our jobs market has been astonishing. Our unemployment has been hovering around historic lows of 3.2%-3.3% since the second half of 2021. The figure for the September quarter was 3.3%.
Increasingly, this tightness in the market, coupled with the inflationary impacts that have come through - initially due to supply chain issues - has seen strong upward pressure on wages. Average private sector hourly wage growth hit an annual rate of 8.6% as of the September quarter.
So, the big question is, will there be any relief on either the employment or wages front when the latest labour market figures are released on Wednesday, February 1?
Well, the RBNZ is certainly not expecting relief yet. It has forecast unemployment to drop again, to 3.2% for the December 2022 quarter, while it is forecasting an annual rate of average private sector hourly wage growth of 9.1%.
After this the RBNZ reckons unemployment IS going to start lifting. It sees unemployment rising to 3.6% in the March quarter, which will, incredibly, be the highest rate of unemployment since mid-2021 if it happens. And the RBNZ is forecasting unemployment to keep rising during the year, to reach 4.8% by the end of December 2023.
Likewise wage growth is being forecast by our central bank to moderate during the course of the year after a last big spike in terms of percentage growth in the December quarter. But even then, it's only forecast to reduce to a still-high 8% by the end of 2023.
If we assume the figures in the coming week do show still extremely low unemployment and high wages, the key thing then will be if there is any sign at all of a future developing weakness.
After the latest inflation figures came in well below the RBNZ's forecast (annual rate of 7.2% versus RBNZ forecast of 7.5%) there's been a growing expectation that the central bank may now back away from its earlier signposted 75 basis-point hike to the Official Cash Rate in the next review on February 22. A 50-point rise, which would take the OCR to 4.75% is now being seen as the most likely.
However, if the labour market figures are just super, super strong, then this could definitely tip the balance back in favour of a 75-point rise. So, these figures in the coming week are going to be crucial.
The problem of course is that the labour market figures are essentially backward looking and reflect what's happened - not what might be about to happen.
In terms of what might be about to happen, however, there does appear to be mounting evidence that the jobs market WILL start to soften soon.
The BNZ/SEEK employment report for December, for example, demonstrated the kind of downswing RBNZ is looking for. BNZ senior economist Craig Ebert said that "far from being an aberration", the 8.3% drop in November’s job ads proved to be a pretty good pointer to further weakness in December.
"Job ads fell 6.3% in the final month of 2022. This took the cumulative fall over the last four months to around 20%, based on the seasonally adjusted series. It’s been a similar sized drop in trend terms. This measure also marked jobs ads, in December 2022, at about 20% above their 2019 average, whereas in mid-2022 they were running around 40% higher than that pre-Covid point of reference. It’s been quite the cooling. Indeed, tracking the trend forward, jobs ads could be back down to pre-Covid levels by the middle of 2023."
And in their preview of the forthcoming job figures, ANZ's economist Finn Robinson and senior economist Miles Workman highlight that timely indicators of labour demand "turned decidedly negative in the final months of 2022".
"However, given the extreme mismatch between labour demand and supply that persisted over 2022, and the additional pressure generated by the revival of international tourism, we don’t expect to see a significant easing in labour market tightness until later this year."
Robinson and Workman say this week's labour market release "will probably still portray a labour market facing historically low levels of unemployment, and very high wage growth at the end of 2022".
"But this is not a reflection of the state of play in 2023, which is pointing towards labour demand dropping sharply as the impacts of the fastest OCR hiking cycle on record work their way through into the real economy."
I'm expecting that the labour market figures will be strong and wouldn't even be surprised to see the unemployment rate maybe dip down to 3.1% from 3.3% previously.
However, what if everybody is wrong, and the figures come up with a surprise and maybe even show a rise in unemployment? That would certainly put the cat among the pigeons in terms of what the expectation might be then of what the RBNZ will come up with in its February OCR review. Downward pressure would come from the wholesale interest rate markets.
I raise that seemingly slim possibility (of an unemployment rise), because we should always be prepared for a shock - and it's fair to say the labour market data does throw up some shocks from time to time.
But if we do assume that it will be 'business as expected' with a fall in unemployment and high wage growth, then it will be a question of trying to work out how happy the RBNZ will be to treat this data as 'last year's news' and focus on the idea that the jobs market is about to soften.
Just how the RBNZ treats the data will then be the key factor in whether the central bank keep the foot firmly down on the interest rate accelerator (75-point hike) or starts to show signs of easing off (50-points and perhaps a less 'hawkish' statement).
I dare say that the markets and the public won't be watching the announcement of these figures as closely as last week's inflation figures were observed. But really, the labour market is the key to everything at the moment. And if the imagined looming slowdown doesn't start to materialise soon, this will increase the size of the RBNZ's headache.
*This article was first published in our email for paying subscribers early on Friday morning. See here for more details and how to subscribe.
48 Comments
Totally agree on the 75 bps move Officebound. A bit like a Homer Simpson moment for the Governor who should have been continuing with the steady pace that they initiated given it is easier to slow the pace back down to 25 bps increases from your 50 bps previous moves. Looks like he crazily stepped on the accelerator rather than the brake.
Only a 50 bps increase to come at their 22 Feb meeting otherwise they will look like they have no clues as to what is happening in the real world.
Apologies for being totally off topic, but I just noticed that PDK is still alive and well and posting on Resilience.com, for all those who were wondering where he'd got too recently. (Has he been banned from here?)
The Russian oil is still flowing into the west and a lot of Europe are still using Russian gas.
Not the cleanest source but in the middle:
https://www.dw.com/en/fact-check-is-india-violating-the-eu-oil-embargo/…
I think unemployment is going to worsen much faster than the pretty charts show because the construction industry is both an unfolding train wreck and overall a massive employer. A short spike due to replacing gib and carpet in Auckland homes isn't going to do much in the long-term scheme of things.
We don't know the numbers yet in terms of flooded houses but re-lining, replacing joinery, re-wiring, re-carpeting and redecorating potentially thousands of extra homes will take a significant time to work through. Like, years. It's often slower than building a new house.
Obviously that's going to be a geographic blip in demand, and we don't know the full extent of the coming economic upheaval, but lower value insurance work is at the least steady reliable revenue.
Do you know of many firms laying people off? Every owner of a construction based firm I know are still struggling to meet demand.
The entire deck was ripped off a place down the road, looked like 50 sqm. Every single fence of every property along the creek was destroyed. Could be 10s or thousands of properties needing some kind of work.
The Napier floods a few years back kept their builders busy for at least a year. That may have been a bit different as sewerage was mixed with the flood water so everything needed replacing.
I hear alot of stories about construction cooling off but does anyone have any reliable data that would confirm it? We only have vague evidence - we service lots of different industries and we have noticed 'more builders than usual' trying to cut their monthly bills or bouncing their DDs.
I saw a couple 'For Sale' signs on the news last night. Right behind the torrent of water in their street. How many home-owners will now find their biggest asset, worthless? Risky business this being a property owner, in so many unexpected ways, beyond just the escalating cost of Debt.
The oldest Baby Boomer - the biggest cohort of labour ever unleashed onto the global economy - is now 77, and probably well into retirement. We are well past half-way through that retirement phase, with anyone born after 1958 left to reach the official retirement age (and a right to claim on the income of the country via the pension). As each day passes, more will avail of that opportunity and leave whatever job they have, vacant.
Some of those jobs will be redundant, but not all by any means. And as that happens, and with fewer workers produced to replace those who are retiring, then expect unemployment to stay low.
Importing new workers isn't the answer - it just perpetuates what we have.
So at some stage, like Japan, we will have to bite the bullet; settle into a World of deflation and watch as the population reduces around us to a more sustainable level. (Yes, I know that Japan is having a rare bout of Inflation at the moment. But that is unlikely to last)
Because soo many of those boomers are not as productive as their replacements will be, many are just occupying a space. How many people work in areas that service predominately boomers who can afford their services? As they retire, their belts will tighten, priorities change and demand will reduce. The only exception will be increased demand for healthcare services, and we aren't interested in supporting those industries so now what? wait for rapid decline in health outcomes for the elderly wealth hoarders
It’ll be the robots. Rather than taking our jobs and leaving populations of poor, robots will fill the void of medial work left behind by an 8b population footprint declining. Not going to happen overnight, but artificial intelligence pegged to make many jobs redundant as computers and the internet have before that, and machines before that, and tools before that.
If you’re in need of job security, have a statistical/mathematical mindset and rudimentary software engineering education then that would be a solid career move over the next 10-15 years.
I reckon…
Edit: I don’t mean humanoid robots just as an fyi
I understand as far as a numbers game, also reserving a pool of “ready for work”ers helps put an end to progressive wage spiralling. The real question is why the worker must take the fall for the economy when we know how much money is out there in the hands of very few. To me it signals the result of years of mismanaged fiscal and tax policy
Nope, as the next poster says, it's a misallocation of labour. If everyone is working in zombie companies/industries who rely on perpetually increasing land/house values or perpetual printed money from government, in a time when population is peaking/shrinking, then we have structural economic issues. A good recession usually sorts this out but Central Banks have been actively avoiding one for a couple of decades by printing ever increasing money and putting it into assets. They are now saying they have learned their lesson cos of inflation caused by system shocks.
Hoping for unemployment to rise ...good luck with that..in case the govt hasnt noticed theres shortages in nearly every sector. Hoping for wages to decrease...not with fuel and living costs rising...its begining to look like a train wreck... an OCR rise will tip the scales alright.... lol
The shortages will disappear if demand for services (like hospitality) disappears. Although our economies are so efficient these days there aren’t that many jobs that aren’t needed and a lot of the demand is from those cashed up.
Still only need to increase unemployment slightly, a 1% increase would probably do.
So the govt/bank slash interest rates and spray liquidity, which bloats asset prices and (relatively speaking) disincetivises work.
That cheap cash then flows through to consumer prices, putting upward pressure on wages as the economy tries to rebalance in favour of work.
But No, says the govt/bank, that cannot be allowed, so looks desperately for an excuse hidden in the employment stats to return to step 1) slash interest rates and spray liquidity.
Thank goodness we have central planners to handle this complicated stuff for us.
why a recession is guaranteed . . ..
1. COL/ inflation still an issue
2. House sales down in Auckland, the city many want to leave.
3. Supply of houses for sale is huge and increasing by 300 a day.
4. Demand is very low.
5. Delusional RE industry / owners over pricing houses thus no demand!
6. Immigration as many people leave the labour party induced shit hole .
7.many business's will fall over or increase redundancies thus unemployment will grow!
8. Debt govt & private
9. Taxes increase to pay debt, post election.
10. Feel free to add more.,.
11. Energy prices rise despite a glut of supply ( electricity).
12. Rates will sky rocket as council's scramble to fix infrastructure and still waste money on non core business "flights of fancy"
its going to be a hard winter.
Is this why the S&P/NZX50 was up 1.03% today?
Up 280% since 2009 according to Google.
When business confidence nationwide is at a low, in an economic slump and on the brink of WW3, our stock market is pumped! Or is everyone piling in because it has become the last game in town?
I don't get it!
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.