Wage growth lowest in 8 years; likely to reinforce RBNZ's 'low til middle of 2010' view on OCR (Update 1)

The labour market remained in its weak state in the December quarter, with wage figures released today likely to reinforce the Reserve Bank's expectation that it can keep the Official Cash Rate (OCR) on hold at 2.5% until 'around the middle' of 2010, economists said. (Update 1 includes ANZ comment.) Salary and wage rates, including overtime, rose 1.8% in the year to the December quarter, the lowest rate of growth since the year to June 2001, Statistics New Zealand said following the release of the December quarter Labour Cost Index (LCI) and Quarterly Employment Survey (QES). A key figure watched by economists, private sector ordinary time wages, grew 0.3% in the December quarter from September, slightly below market expectations of 0.4% growth. ASB economist Nick Tuffley said wage growth looked to be tracking within Reserve Bank expectations or a fraction below, meaning the central bank's outlook for wage related inflation was likely to be little changed. Unemployment figures for the December quarter are due out on Thursday, with economists picking the unemployment rate will rise to 6.8%  from 6.5% in September. ANZ economist Khoon Goh said the figures confirmed ANZ's view that employment growth figures on Thursday will be weak. ANZ economists are picking the Reserve Bank will hold off raising the OCR until June 2010, as opposed to ASB's April expectation. Here is the release below from Stats NZ:

The Labour Cost Index (LCI) recorded an increase of 1.8 percent in salary and wage rates (including overtime) in the year to the December 2009 quarter, Statistics New Zealand said today. This is the lowest annual increase since one of 1.8 percent in the year to the June 2001 quarter, and continues a decline recorded in annual wage growth over the past 15 months from a peak of 4.0 percent in the year to the September 2008 quarter. Salary and wage rates (including overtime) for the public and private sectors increased in the year to the December 2009 quarter by 2.4 percent and 1.6 percent, respectively. The increase for the public sector is the lowest since an identical increase in the year to the September 2004 quarter, while the private sector increase is the lowest since a 1.6 percent rise in the year to the March 2001 quarter. In the December 2009 quarter, salary and wage rates (including overtime) increased 0.4 percent, following an increase of 0.5 percent in the September 2009 quarter. The public and private sectors recorded similar movements, with increases of 0.3 percent for both these sectors in the December 2009 quarter. For those surveyed salary and ordinary time wage rates that rose in the December 2009 quarter, the median increase was 2.9 percent. This compares with a median increase of 3.7 percent in the September 2009 quarter. The latest median increase is the lowest since a median increase of 2.8 percent in the March 2001 quarter. The slow-down in annual wage rate growth has occurred during a period in which the business demand for labour has declined. The Quarterly Employment Survey (QES) results show that for the year to the December 2009 quarter, employment, as measured by the number of full-time equivalent employees, decreased 2.5 percent and filled jobs decreased by 1.7 percent. The manufacturing and construction industries were the main contributors to both these annual decreases. The QES results also showed that seasonally adjusted gross earnings increased 1.9 percent for the year to the December 2009 quarter, while seasonally adjusted total paid hours decreased 1.8 percent for the same period. Despite a fall in paid hours, total gross earnings increased over the year, leading to a 3.7 percent increase in the average total hourly earnings in the year to the December 2009 quarter.

Here is Nick Tuffley's take on the figures:

The RBNZ forecast private sector (overtime inclusive) LCI annual growth of 1.5% for the March 2010 quarter. For that forecast to be met would require a Q1 quarterly increase of 0.5%, a step up from Q4's 0.3%. That suggests that wage growth tracking within RBNZ expectations or a small fraction below, so the RBNZ's outlook for wage-related inflation is likely to be little changed at this point. Thursday's HLFS employment report will give a more forward-looking idea of how much slack remains in the labour market and, hence, how long wage growth will remain muted. The activity-related measures, such as full-time equivalent employees and hours worked imply labour effort was pretty flat over the quarter. We remain comfortable with our expectation that Thursday's HLFS will register a flat outcome. Although we expect the unemployment rate will track higher over 2010, there is likely to be some pick-up in wage growth this year. Some of last year's austerity measures, such as wage freezes, are likely to be relaxed and competition for skilled workers is likely to pick up as the economy improves. The RBNZ will likely see today's outcome with lifting the OCR "around the middle of 2010", though we continue to see the risks lying to a slightly earlier start, in April. The disinflationary impact of falling wage growth is likely to wear off over the course of this year, one of several reasons why we expect inflation to lift from being at the mid-point of the target band currently to the top end in 2011.

Here is ANZ economist Khoon Goh's take on the figures:

Wage growth is typically one of the last "˜indicators' to turn as the economy slows and so the generally soft numbers today shouldn't really come as a surprise. However, the speed at which wage growth has slowed has been reasonably pronounced. Today's outturn again demonstrates the flexibility of the labour market. Faced with the choice of accepting lower wage increases and working reduced hours, or running the risk of losing their jobs, employees and employers have opted for the former course of action. Employers are likely to have been rather pragmatic when it comes to staffing decisions during this cycle (perhaps due to memories of previous shortages in the previous cycle) and are often looking at other means "“ other than job losses "“ to contain the wage bill. Limiting wage increases are one of the options that they have used. As such, we continue to expect that wage inflation will remain moderate going forward, even as the economy continues to gather forward momentum. Today's data confirms our view that employment growth in Thursday's HLFS is likely to be weak. We expect that employment will remain flat (-0.1 percent) and for the unemployment rate to rise to 6.8 percent. While the level of the latter is modest by historical standards, it's near doubling since the late 2007 trough (3.5 percent) represents a sizeable deterioration in labour market prospects. The critical thing to watch for the labour market going forward is the fact that the significant slack that is currently present within the current workforce could mean that the economic recovery is less employment rich. Firms will likely look to increase their current workforces' hours rather than adjust absolute staffing levels. This will mean the unemployment rate may not fall as quickly as has occurred in previous recoveries. The labour market is likely to remain a key headwind for de-leveraging households. In terms of the implication for monetary policy, the RBNZ will be comfortable with the benign wage backdrop, in terms of the implication for the medium-term inflation outlook. We remain comfortable with our view of a June start to the tightening cycle, as the RBNZ seeks evidence of stabilisation/improvement in the labour market before hiking rates.