Unemployment rate rises to 7.3%, worse than expected; NZ$ falls (Update 5)

New Zealand's unemployment rate rose to a seasonally adjusted 7.3% in the December quarter from 6.5% in September, as more people entered the job market but could not find work, Statistics New Zealand said. (Update 1 includes Stats NZ release, Update 2 includes labour force participation rate, Update 3 follows currency movement, Update 4 includes ASB economist reaction. Update 5 includes BNZ economist reaction.) Economists said the result was worse than the Reserve Bank expected and meant the central bank would remain comfortable with its outlook of a steady Official Cash Rate (OCR) at 2.5% until mid-2010. Wholesale interest rates and the New Zealand fell slightly as financial markets nudged their expectations of the OCR down a bit. Retail mortgage and deposit rates, however, are unlikely to fall as banks face higher funding costs and capital requirements in coming years. Bank net interest margins have fallen more than 20 basis points in the last year as they are forced to raise term deposit rates to encourage deposits from local savers and to pay higher rates for international wholesale funds. Economist expectations had centred around the unemployment rate rising to 6.8% during the quarter. The New Zealand dollar initially fell from 70.8 USc to 70.1 USc on the news and had fallen to around 69.9 USc by 11:30am. ASB economist Chris Tennent-Brown said the headline unemployment figure was higher than economist expectations because more people chose to enter the workforce than was expected at this stage of the economic recovery. Tennent-Brown said the figures would continue to make the Reserve Bank comfortable with its view that it can keep the Official Cash Rate on hold at 2.5% until the middle of 2010 (see full comments below). BNZ economist Stephen Toplis said the figures showed some slack in the market that meant the Reserve Bank could be relaxed about its current monetary policy outlook. (See fuller comments) Seasonally adjusted figures show an extra 16,000 people joined the labour force during the December quarter (up 0.7%), while the number of unemployed rose by 18,000 to 168,000 people. This was the highest number of unemployed people since the June 1993 quarter, Stats NZ said. The 7.3% unemployment rate is the highest level since the June 1999 quarter and up from 4.7% in December 2008 and 3.5% in December 2007. The number of employed people fell by 2,000 to 2,152,000. The labour force is made up of those in work (employed) and those not in work but searching for it (unemployed). The number of working age people out of the labour force altogether rose by 4,000 (0.3%) to 1,086,000. The labour force participation rate rose 0.1% to 68.1% of the total working age population in the December quarter from September. Here is the release from Stats NZ:

In seasonally adjusted terms, the number of unemployed continued to increase during the December 2009 quarter, reaching 168,000, while the unemployment rate rose to 7.3 percent, Statistics New Zealand said today. The unemployment rate is now at its highest level since the June 1999 quarter. The increase in unemployment and the unemployment rate was mainly due to a rise in the number of people entering the labour force but unable to find work. During the past year, the increase in unemployment was particularly marked among the youth (15"“24-year-olds), with the unemployment rate for this group rising 6.4 percentage points to reach 18.4 percent. There were also marked differences in the unemployment rates by ethnic group. The unemployment rate remains high for the Māori (15.4 percent), Pacific peoples (14.0 percent), and Middle Eastern/Latin American/African (17.1 percent) ethnic groups, while the unemployment rate for the European ethnic group stands at 4.6 percent. Employment fell slightly during the quarter with the number of people employed decreasing by 2,000 or 0.1 percent, compared with a 16,000 decline in the previous quarter. Full-time employment drove the latest decrease in employment. Actual hours worked also fell by 0.4 percent consistent with the fall in employment during the December 2009 quarter, and by 3.2 percent since the December 2008 quarter. During the last year, employment fell by 53,000 or 2.4 percent. There were large decreases in the number of people employed in the Auckland and Canterbury regions. There were also marked decreases in employment in the manufacturing; retail trade and accommodation; and arts, recreation, and other services industries. On the other hand, employment in the health and social care assistance, and financial and insurance services industries has increased notably. The labour force participation rate increased slightly by 0.1 percentage points to 68.1 percent during the latest quarter. There were 16,000 (0.7 percent) more people in the labour force due to an increase in the working-age population (0.4 percent) and an increase in the number of people unemployed.

Here is ASB economist Chris Tennent-Brown's take on the figures:

The headline figures make the employment situation look worse than it is. Unemployment is rising because there are more people looking for work than there was previously (and more than expected at this stage of the economic recovery). In contrast, much of the preceding increases in unemployment came through the shedding of jobs. The RBNZ's December MPS contained a Q4 employment forecast of -2.4% yoy, which is in line with the actual employment outcome. Like us, the RBNZ will have been surprised by the extent of the lift in the labour force and consequent impact on unemployment (the RBNZ's forecast for the March quarter unemployment rate "“ i.e. the quarter that follows today's release "“ was 6.6%. The implications are a greater than anticipated degree of slack in the labour market and, hence, potential for wage growth to remain subdued for longer. From an activity point of view the implications for the RBNZ's outlook are less negative: employment was in line with RBNZ expectations though hours worked were a touch softer. The data will continue to make the RBNZ comfortable with its "around the middle of 2010" signalling for starting to lift the OCR. Our view is for an April hike of 25bp, timed for after the key GDP, CPI and business confidence releases. However, the HLFS data do skew risks to the June MPS.

Here is BNZ economist Stephen Toplis' take on the figures.

The data confirm to us that there is sufficient slack in the labour market to be significantly constraining any inflationary pressure from this source. Accordingly, the RBNZ can remain reasonably relaxed with its current monetary settings. Nonetheless, while the unemployment rate looks ugly, not only will unemployment peak at a lower level than past cycles, but there is also very clear evidence that the recovery is gaining sufficient momentum to start creating jobs again soon. It's not that the labour market is suggesting a weaker than anticipated pick up in economic activity. To the contrary, it is consistent with an economy which is well and truly turning the corner. Indicative of this, today's Household Labour Force Survey report, for the December quarter, showed that only a net 2,000 people lost their jobs in Q4 (a 0.1% drop in employment). This is a marked improvement on the average of 17,000 a quarter over the previous nine months. Moreover, it is entirely consistent with our view that, on a net basis, there will be no more layoffs.