Only one remaining thing might yet prompt the Reserve Bank (RBNZ) to raise the Official Cash Rate (OCR) next month - and that would be any nasty surprise with labour market figures.
Statistics NZ is set to release the full suite of labour market figures on Wednesday, November 1. The key numbers to look for are the unemployment figure and the wage rise figures.
As per its most recent set of forecasts, in the August Monetary Policy Statement, the RBNZ is forecasting unemployment of 3.8% as at the September quarter. Stats NZ produces a number of measures of wage increases. For simplicity's sake I like to follow the private sector average hourly earnings. The RBNZ's forecasting annual growth of 7.1% in this figure.
Why do labour market figures matter?
In the context of 2023 New Zealand they are very important because the very tight labour market we've had - amplified by the border closures during the pandemic - has been a key contributor to inflation. The RBNZ needs to see 'slack' coming into the labour market to help ease inflationary pressures and to help it get inflation back inside its targeted 1% to 3% range. Inflation has been outside that range since the middle of 2021.
But with the borders now open wide, the labour market situation is cooling.
Migrant workers have been pouring into the country this year. Ministry of Business Innovation and Employment figures show nearly 200,000 people entered NZ on work visas in the 12 months to September.
And for sure, these workers are soaking up vast numbers of jobs. But the interesting thing is, the more jobs are filled, the more it looks like our official figures were actually under-estimating just how tight the market was.
Our unemployment rate bottomed out at 3.2% in early 2022. As tight as that figure made our labour market look - in reality it seems even that figure understated things.
Stats NZ's latest available employment indicator figures show that even though the labour market is demonstrably cooling, in August more than 5700 additional jobs were filled. It now seems pretty clear that significant numbers of employers simply gave up trying to fill some jobs during the time the border was closed.
What this all means is that additional jobs are still being filled, even as the unemployment rate starts to rise. But the unemployment rate has started to rise only slowly and much more slowly than was earlier picked by economists and the RBNZ - probably because of the aforementioned understatement of just how tight the labour market has been.
Unemployment hovered around between 3.2% and 3.4% from September quarter 2021 till and including March quarter 2023. Finally it shifted up to 3.6% in June.
The annual rise in private sector average hourly wages was 7.7% in June 2023, down from a peak annual rise of 8.6% as of September 2022.
So, remember, the RBNZ's looking for 3.8% unemployment as of the September quarter 2023 and and annual private sector average hourly increases of 7.1%.
Achievable? It looks that way.
The major bank economists seem to be leaning pretty much the same way as the RBNZ is thinking. I had previews from economists at Westpac, ANZ and ASB in front of me at time of writing this. The economists were pretty much in concurrence with the RBNZ pick on wage inflation.
As far as the unemployment number, they all picked 3.9%, which of course is actually slightly higher than the RBNZ's picking.
If the labour market figures do turn out to be somewhat in line with the RBNZ's forecast then it is to be imagined that the central bank will keep the OCR 'on-hold' at 5.50% when it has its last review for the year on November 29.
An 'on-hold' decision has appeared near-certain since the September quarter annual inflation figure came in at 5.6%, below most economists' forecasts and under the 6.0% the RBNZ had forecast.
As said at the top of this article, the only thing that might, and it's a fairly big might, force the RBNZ to change its mind and hike the OCR again in November is if there's a big shock in those labour market figures - either the unemployment figure actually goes down, or maybe the rate of wage growth actually increases.
Either, or particularly both, of those outcomes would give the RBNZ a serious headache. After the November review it is three whole months till the next one and the RBNZ would not want a summer break during which it is not feeling in control of matters.
Notwithstanding all that though, I think the RBNZ would currently have a 'high bar' as the economists like to style it, to changing the on-hold stance it has held since May of this year.
Given that inflation, which, of course, is the big goal here, is at this point tracking in the right direction, the RBNZ may want to 'look through' any adverse surprises in the labour market figures.
It is worth bearing in mind though, that as per its August 2023 forecasts, the RBNZ was expecting both a big decline in inflation and a big rise in unemployment in the fourth quarter of the year that we are now in.
It forecast annual inflation to fall to 5.2%. As we know, it has already had a positive surprise, with inflation coming in at 5.6% as of September.
However, the unemployment forecast may yet prove more problematic - with the RBNZ expecting a big rise from its forecast 3.8% as of September to 4.4% in December.
It is worth mentioning this, because if the unemployment figure comes in lower than 3.8% for the September quarter then this would put a lot of pressure on that forecast for the December quarter. The RBNZ would be getting behind the eight ball.
Alternatively, if the figure comes in higher than 3.8% then it makes the December forecast look that much more realistic and achievable.
So, in the end, the labour market figures being released in the coming week are probably unlikely to change the RBNZ's mind on the OCR for now, but may have significant ramifications for the RBNZ's early thinking ahead of its first OCR review of 2024 on February 28.
For the RBNZ the unemployment figure really needs to show a continued weakening in the labour market. As long as it does then the chances remain fairly good that we have seen the last of the OCR hikes, and therefore next year will become a story of when we can expect to see interest rates come down.
But, let's face it, with the global political and economic situation looking anything but stable, there could be plenty of bumps in the road yet.
*This article was first published in our email for paying subscribers early on Friday morning. See here for more details and how to subscribe.
27 Comments
If people are getting enough wage increases to be keeping up with inflation, the demand for products and services will continue, as demand destruction will not take place, as people can afford to keep paying more for everything. Unfortunately the official cash rate is a rather blunt tool that affects some people more than others, ie mortgaged property owners, but helps savers and can reduce inflation if high enough, but inflation itself is far more damaging and impacts everyone.
Let me get this straight. "They" inflate the money supply to pay for us all to stay home and to save the economy from the impact of lockdowns (which "they" imposed). Now "they" must damage the economy (unemployment etc.) to... save the economy from the inflation "they" created.
"They" being this ugly government/banker cabal, that we seem to get whatever way we vote.
Lol fkups from RBNZ one after another and to fix their fkups NZers have to become unemployed.. otherwise more pain is unleashed onto the families and businesses with loans and mortgages with more pillaging of the country from the Aussie banks... but no heads are rolled at RBNZ rather they've doubled in size since 2018.. what a fkin joke..
7% wage inflation? Again? The RBNZ knows this and they are not doing anything ? They are playing a dangerous game by waiting for inflation to drop. In previous cycles the peak inflation is short and sharp and drops down again within a quarter, but we've had inflation north of 5% for two years. If 5% per annum inflation becomes ingrained in prices and wage expectations, we could see a decade of crippling inflation like the 1970s..
It was never going to go any higher, everyone should have figured that out by now because the impact on the housing market would have crashed the economy. 8% mortgage rates are the max and even then there will be an already calculated percentage in trouble that are "Collateral Damage".
RBNZs mega salary pontificators total limit of vision about their path to inflation target "success" is to make everyone else in NZ relatively poorer.
What's wrong with this picture?
"Some of you may die but that's a price I'm willing to pay" Lord Farquaad (Shrek)
well, how much did Orr's f..k ups cost the NZ economy, with the RBNZ stupidly ultra-loose monetary policy of the last few years? And how damaging has been Labour's arrogance in re-appointing this clown just a few months before the elections, so that getting rid of him now is going to be quite tricky ?
sack him regardless of the cost - on the grounds that he has failed to meet his targets - and give him nothing until ordered to do so by a court - make him fight for it
It will also send a very powerful message to other govt HOD's that targets are to be met or you are unemployed
"Borrow and Spend" wasn't a government policy. That was Orr's monetary policy mantra.
Selling homes to each other at ever inflated prices and "money" creation wasn't a government policy, whether fueled by tax breaks, greed/fear or FOMO. That was a choice of the people.
And for sure, these workers are soaking up vast numbers of jobs. But the interesting thing is, the more jobs are filled, the more it looks like our official figures were actually under-estimating just how tight the market was. Our unemployment rate bottomed out at 3.2% in early 2022. As tight as that figure made our labour market look - in reality it seems even that figure understated things.
More likely the simple fact of adding 200,000 people to the population has created more demand from all the goods and services those people need. This is quoted from a Reddell article:
Immigration shocks in New Zealand over this specific period tend to have added more to demand (including for labour) in the short-run than they add to the economy’s supply potential (but after 3 years and more – recall these are monthly numbers – that effect fades out, leaving the output gap effect basically zero).
From this years annual predictions post: https://www.interest.co.nz/personal-finance/118979/2022-was-weird-year-…
This years prediction:
The unemployment rate in New Zealand will not exceed 4.2% in 2023.
Even if there is a recession, which is nowhere near a foregone conclusion, our population age demographics will keep unemployment rates ultra-low.
We have had a per capita recession but the employment market has continued to push back.
I keep thinking back to some commentary I saw summarising Michael Burry betting on central banks bottling out too early on the initial fight against inflation. No idea if that's what he's doing or not, but at the time I thought he's probably going to be right here.
Unemployment will be very slightly higher. What I'm seeing is that people who are out of work are struggling to find new jobs. But people recently 'given a reading of the tealeaves' (know their jobs are in danger) are moving to new jobs without too many problems. The under-utilisiation rate will be up. Possibly significantly so.
Wage growth will dip - possibly noticably so.. Business wallets are shut as they're just too many black clouds on the horizon.
Or I my predictions might be three to six months too early ... again. ;-)
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