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By Bernard Hickey
Employment grew strongly again in the March quarter, but unemployment rose unexpectedly and wage inflation remained below the Reserve Bank's target as migration of young men and rising workforce participation more than soaked up the jobs growth.
The figures suggest household income growth and consumer spending will continue strongly through 2015, but that nominal wage inflation remains weak enough for the Reserve Bank to consider rate cuts later in the year. ASB changed its interest rate view from seeing a 50% chance of a rate cut later this year to now expecting two rate cuts to 3% by the end of this year. Deutsche Bank also changed its view to expecting two OCR cuts later this year.
The New Zealand dollar fell more than half a cent to near a one month low of 74.6 USc and wholesale interest rates fell 6-8 basis points on increased market expectations of a rate cut later this year.
Statistics New Zealand reported the unemployment rate was unchanged at 5.8% in the March quarter from an upwardly revised 5.8% in the December quarter, but largely because the labour force participation rate rose to a new record high of 69.6% to overwhelm the strong annual jobs growth of 3.2%.
The unemployment rate has bounced from a five year low of 5.5% in the September quarter of last year, although it is down from 6.0% a year ago. The trend unemployment rate rose to 5.9%, its highest in 12 months.
The number of unemployed people rose 3,000 in the quarter to 146,000, including a rise of 6,000 in male unemployment to 71,000 and a 3,000 fall in female unemployment to 75,000.
The number of people employed rose 16,000 or 0.7% in the quarter, but this was more than soaked up by a rise in the workforce of 16,000 as the participation rate rose 0.2%, including an extra 16,000 men and 2,000 women. The 0.7% jobs growth was a bit below market expectations for 0.8% growth.
"High net migration for the 20–34-year age groups contributed to the growing working-age population," Statistics NZ said.
Average ordinary time hourly earnings were unchanged for the quarter at NZ$28.77/hour and annual inflation was 2.1%, which was the lowest increase since the year to the June 2013 quarter.
The figures reinforce the recent trends of solid jobs growth with low inflation and the indications of only modest wage growth will be watched closely by the Reserve Bank, which said last week it could cut interest rates if wage growth settled at levels below the inflation target, which is 2% under the current Policy Targets Agreement.
Statistics New Zealand reported salary and wage inflation including overtime was 0.3% for the quarter and 1.7% for the year.
It said the Labour Cost Index (LCI) measure of wage inflation, which strips out the effects of promotions and is closely watched by economists and the Reserve Bank as a 'truer' measure of wages, rose 0.3% in the quarter. This was below the 0.5% seen in the December quarter and below the 0.4% expected by economists.
Economist reaction
ASB Chief Economist Nick Tuffley said the bank had moved to forecast the RBNZ would cut the OCR twice later this year -- one 25 basis point cut in September and one in October.
"We believe the risks of inflation taking too long to make a sustained return to the 2% mid-point of the inflation target have now got high enough to warrant a response," Tuffley said.
"Accordingly, we think the RBNZ will give inflation a nudge up through 50bp of cuts, most likely 25bp in each of September and October. But an earlier start is conceivable," he said, adding there was a 60% chance of cuts occurring.
"The main risk from a lower OCR is the housing market through the likelihood of added price growth. Even there, we would expect the RBNZ to keep working on making the financial system even more resilient, while exhorting local and central government to do more to address the root causes of Auckland’s housing imbalance."
ANZ Senior Economist Philip Borkin said data was consistent with solid GDP growth in 2015.
"However, the main news was again the significant growth in labour supply, with another solid gain in the working age population and record participation ensuring the unemployment rate remained unchanged (at an upwardly revised level)," Borkin said.
"This supply response is capping wage inflation – which surprised on the downside and is even showing signs of further moderation based on some measures – reinforcing that the labour market is at the heart of the current “solid growth but low inflation” conditions the economy is experiencing," he said.
"It ensures the risks around OCR settings are skewed downwards."
Westpac Senior Economist Satish Ranchod said the data was weaker than expectations with "lingering unemployment and soft wage inflation despite continued firm jobs growth."
"Wage inflation continues to be dampened by low consumer price inflation, which has meant that cost of living adjustments to wages have been limited," Ranchod said.
While the economy is growing at a solid pace, there is lingering spare capacity in the labour market and nominal wage pressures remain subdued. This reinforces our expectations that the OCR will remain on hold for some time, and at the margin, adds to risk of cuts over the coming year," he said.
BNZ Senior Economist Craig Ebert said the data was not strong enough to soothe the Reserve Bank's concerns about inflation failing to strengthen as forecast.
"Accordingly, the possibility of the OCR being reduced is increasing. But we are not changing our cash rate call on the basis of today’s data," Ebert said, adding however that BNZ still saw the OCR on hold for the forseeable future.
He said the jobs growth was not weak, pointing to a 4.1% rise in full time equivalent employment in the quarter from a year ago, which was the strongest growth since 1996.
However, the markets were focused on the failure of the unemployment rate to fall and the weak annual LCI inflation of 1.8% for the private sector.
"This (the unemployment rate) was the number that genuinely surprised us, when all the talk has been that staff are becoming more difficult to find. It could just be that the flood of net immigration that the country is experiencing is proving just as hard to absorb," Ebert said.
He said the LCI result was below the Reserve Banks’s expectations.
"In its March Monetary Policy Statement the Bank predicted a 2.0% annual gain in the private-sector (all salary and wage rates) Labour Cost Index. It actually came in at 1.8%. Normally this would have passed the market by. But with the Reserve Bank recently noting the importance of wage and price setting behaviour in its policy considerations, any misses, even fractional ones, are now seen as a big deal," Ebert said.
Political reaction
Employment Minister Steven Joyce said the strong jobs growth was encouraging and pointed to jobs growth of 194,000 since the 2011 Budget as more than the 171,000 forecast in that Budget. He also pointed to hourly wage growth of 2.1% being higher than inflation of 0.1%.
Green Party Housing Spokesman and male leadership candidate Kevin Hague said wage inflation was not keeping up with house prices.
“Young New Zealanders see the growing gap between their wages and house prices and despair that the National Government is ignoring their hopes to one day own their own home,” Hague said.
“No matter how hard people save, with such a huge difference between low wage growth and dramatic house price rises, many working New Zealanders are being forced to give up on the idea of home ownership because of the Government’s inaction," he said.
“The simple fact is that a house in Auckland earns more than a working person does."
(Updated with more details and context and reaction from economists and politicians, ASB's changed view to seeing rate cuts in 2015)
33 Comments
What's more it's currently expensive to run a short NZD/USD position. TOM/NEXT roll mid pips imply 4.00% plus cost.
Maybe because of thus:
" ....as migration of young men and rising workforce participation more than soaked up the jobs growth."
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Lots of 'willing to work for a low wage' young men are coming to work in NZ apparently...if you believe the article (the 'stats' were not referenced).
Migration is good for the government...keeps the economy ticking over as it keep wages low....which attracts businesses to settle here....which creates jobs which creates an inflow of people willing to work for low wages....repeat ad nauseum..
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Not good for the existing population because we've invested more than we're getting out of it, and wages are kept low.
No sure, you'll have to ask the author of the article what industries had the 'job growth' quoted....I was only talking about the vicious circle and the race towards the bottom as far as wages are concerned
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I work in Auckland, and it's sickening to see more and more luxury brands opening big shops on Queen street. Dior and Prada recently opened, britomart has clothes shops with clothes where 1 item would cost me a week's wages....
There's truly a big divide, and it's getting bigger.
Got to see the money being spent. Such shops are needed if they want rich tourists going through (Trade Aid only works for some folks).
The fit-outs are _great_ for local trades and suppliers, and are often at a premium (as opposed to residential work or warehousing).
It would be interesting to see if they're still viable in 1 - 2 years.
“When does our credit based financial system sputter / break down? When investable assets pose too much risk for too little return. Not immediately, but at the margin, credit and stocks begin to be exchanged for figurative and sometimes literal money in a mattress.” We are approaching that point now as bond yields, credit spreads and stock prices have brought financial wealth forward to the point of exhaustion. A rational investor must indeed have a sense of an ending, not another Lehman crash, but a crush of perpetual bull market enthusiasm. Read more
"Not immediately, but at the margin, credit and stocks begin to be exchanged for figurative and sometimes literal money in a mattress."
Yet I'm told New Zealanders don't save enough.
Risks of fees, haircuts and super low interest rates (under the real inflation rate of certain items) means the literal mattress is actually a real contender for investment vehicle.
Well It may be critical to our welfare in terms of a fiscal surplus or not. Unexpected deficits will evolve into interest rate rises.
Which leads me to speculate who pays the bulk of tax in New Zealand. United Kingdom MSN claims are a little surprising and slightly disturbing since weaker NZ employment stats have evolved into necessary RBNZ OCR cuts.
Here’s a fact with which politicians should be assailed every day: the poor in this country pay more tax than the rich. If you didn’t know this – and most people don’t – it’s because you’ve been trained not to know it through relentless efforts by the corporate media. It distracts us by fixating on income tax, one of the few sources of revenue that’s unequivocally progressive. But this accounts for just 27% of total taxation. Overall, the richest tenth pay 35% of their income in tax, while the poorest tenth pay 43%, largely because of the regressive nature of VAT and council tax. Read more
Given the recent data out, perhaps I could throw it out there that New Zealand may be in the early stages of experiencing negative economic growth and subsequent deflation?!
Hard to believe 6 months ago the same economists were predicting at least 2 OCR hikes by now... other than fairly ordinary advice I wonder what else they produce for the local economy?
a lot happens in a year, remember this?
http://www.radionz.co.nz/news/national/238723/rbnz-warns-of-more-intere…
I have a theory about the subsequent change in OCR predictions, particularly in relation to inflation.
Though house prices in AKL are going through the roof, a high-ish dollar, and high-ish interest rates I'm questioning as to how inflation has been decreasing in recent times. Wages are stagnant and the price of oil has dropped considerably which would support lower inflationary pressures .
I believe due to Oil companies manipulating markets as one of the primary measures to lower inflation across the globe hence enabling the printing of money and maintaining artificially low interest rates.
My thoughts may be well off the mark, so I'm curious as to how with so much QE inflationary pressures remain so low?
My view dobrydan, oil companies aren't manipulating markets, its a purely supply driven situation which has probably already started to resolve itself with the US shale oil rigs dropping from about 1,600 last year to around 700 currently - that said although oil is now up 50% from its lows, it ain't going back to old highs for a long time. Inflation is low from that move lower over the past 3 qtrs, and from the bigger long-term theme of globalisation and wage levels being slowly evened out globally (a good thing until it hurts your own?).
QE has had an initial impact as well in that what money has circulated from it has gone into emerging markets in particular and into production systems hence an over supply of goods and lower prices. And add to that what it's done to interest rates and desperate search for yield that has seen investors dive into the likes of junk bonds, much of which drove the US shale oil boom with its dis-inflationary consequences. The reason we haven't seen CPI inflation is because the velocity of money has collapsed in the last decade or so and around $2.7tln of the money is sitting in bank's accounts with the central bank. Where it has caused inflation, and its massive, is all in assets not the CPI - and its blowing huge bubbles globally and central bankers know it - why is the Fed talked rate hikes, it isn't anything to do with inflation ?
Rig counts suck as an indicator.
"The average gas production from a shale gas rig is nearly 11 times better than it was in 2007, an analysis of U.S. Energy Information Administration data by Ernst & Young found.
"No one has ever made money betting against this industry's technical prowess," said Foster Mellen, a senior strategic analyst at E&Y's Global Oil & Gas Center in Houston, on April 30.
The rigs being stacked are less efficient," the Mellen said. The rigs that are left are newer and with more horsepower, resulting in even more volumes per rig even if total productivity falls in reaction to low prices.
Plus, drillers have "a sweet spot focus, the industry is really buckling down," Mellen, who has been analyzing the oil and gas industry for 40 years, said.
"There has to be some limit to it," Mellen mused, "but we're nowhere near that point."
https://www.snl.com/InteractiveX/Article.aspx?cdid=A-32436475-11058
And from the WSJ:
"Technological advances in the shale arena have already led to sizable jumps in efficiency. As an example, while the number of rigs remained stable between 2011 and 2014, production of shale oil and gas tripled, rising from around 4 million barrels of oil equivalent per day to about 12 million barrels of oil equivalent a day."
http://blogs.wsj.com/experts/2015/05/06/four-reasons-low-oil-prices-act…
rig count is down 50% on top of that there are signs that indeed US shale oil production is declining, ergo it is looking like it is not a bad indicator. Also oil is not gas btw, the numbers I have seen suggest a doubling (roughly) in speed of completion. Sure we have seen sizable gains in speed of completion plus better targeting but speed gains are now dropping off and teh sweet spots are being drilled intensely Once these are gone then the output per well will drop.
"First, the current level of oil prices means that, from the perspective of producers, it only makes economic sense to develop their highest-quality acreage." One wonders on a company who was not doing that already. Price of the lease will of course have an impact.
rig count is down 50% on top of that there are signs that indeed US shale oil production is declining, ergo it is looking like it is not a bad indicator. Also oil is not gas btw, the numbers I have seen suggest a doubling (roughly) in speed of completion. Sure we have seen sizable gains in speed of completion plus better targeting but speed gains are now dropping off and teh sweet spots are being drilled intensely Once these are gone then the output per well will drop.
"First, the current level of oil prices means that, from the perspective of producers, it only makes economic sense to develop their highest-quality acreage." One wonders on a company who was not doing that already. Price of the lease will of course have an impact.
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