An easing in the very tight conditions in New Zealand's labour market is a "critical precondition" for the Reserve Bank (RBNZ) to stop raising interest rates, BNZ economists say.
In the BNZ's latest Markets Outlook publication, BNZ's head of research Stephen Toplis says with labour supply continuing to deteriorate, thanks to a combination of the resurgence in COVID and increasing net migration outflows, demand for labour "simply must abate" if the RBNZ is to achieve its targets.
"Unless there is clear indication soon that the worm is turning on the labour market front, the RBNZ will have to contemplate a more aggressive interest rate track than it suggested at its May MPS [Monetary Policy Statement] in order to achieve the unemployment forecasts it predicted at the time," Toplis says.
In that May MPS the RBNZ forecast the Official Cash Rate (OCR) to be nearly 3.5% by the end of this year and peaking at just under 4% by the middle of 2023. The OCR is currently at 2.5%, with widespread expectation that the RBNZ will hike it again by another 50 points to 3% at its next review on August 17.
Before that happens, Statistics New Zealand will be releasing the full suite of labour market data for the June quarter on Wednesday, August 3. As at the end of the March quarter, unemployment was 3.2%. In the May MPS the RBNZ forecast unemployment to drop just slightly again in the June quarter - to 3.1%, but then start rising again, reaching 3.5% by the end of 2022.
Toplis says ongoing labour market tightness is "our greatest fear" in terms of the upward pressure on interest rates.
"The RBNZ forecasts the unemployment rate to rise to 3.5% by the end of this year. We, in contrast, see it falling to 3.0% or below."
Two widely watched ANZ surveys, the Business Outlook survey and the Consumer Confidence survey are due to be released over the coming week (on Thursday July 28 and Friday July 29 respectively).
Toplis says he was tempted to headline his latest economic note 'New Zealand in a crisis of confidence'.
"But “crisis” has become so grossly overused and misused of late that it no longer seems to hold any meaning. Indeed, we seem to now have a crisis of crises."
Crisis or not, he says, the "parlous" state of both business and consumer confidence is, and will be, a critical determinant in the evolution of the New Zealand economy over the next twelve months.
"Morose householders do not spend, and upset businesses neither hire nor invest. When both businesses and consumers are unhappy then there is little chance that an economy will flourish."
Commenting on the ANZ's consumer confidence survey series, Toplis says over the last five months consumers’ confidence has sat in a range of 77.9 to 84.4, at levels which are record lows for the series.
"In the first instance, rampant inflation poleaxed hopes and aspirations but, more recently, rising interest rates will have played their part as household disposable incomes are further eroded."
Such low levels of sentiment are consistent with a resultant sharp drop in retail spending, Toplis says.
"The last time consumer confidence got anywhere near as low as its current levels, retail sales fell a cumulative 8.7% in real terms.
"We are not forecasting such a large drop this time around, largely because we think that the labour market will remain relatively tight, but we still think a correction of some sort is highly likely. The biggest hits will occur for discretionary goods and services, and durable goods.
"Durables spending will also suffer from the increased 'leakage' of money used for offshore holidays and the fact that there was a massive run up in durables spending during the Covid lockdowns."
Toplis says only when inflation, more generally, starts to fall and house prices stabilise are we likely to see a marked improvement in confidence levels.
"And confidence is yet to be impacted by an inevitable increase in the unemployment rate."
Toplis says the ANZ's Business Outlook survey this week will give further insight into labour market developments.
"Hiring intentions have been continuously stronger than would be consistent with an increase in the unemployment rate. This has been the theme that we and other commentators have focussed on throughout 2022.
"However, we may have been a bit remiss in not heeding the extent to which hiring intentions have moderated over the course of the year. The direction is clear and employment intentions sat only just above zero when the June survey was released.
"A further reduction in hiring intentions would be one more step closer to indicating a genuine softening in the labour market."
Toplis says he's "just had another look" at his Consumers Price Index (CPI) inflation projections in light of recent commodity price moves, especially the drop in retail petrol prices, and last week’s June Quarter CPI publication, which showed annual inflation of 7.3%.
"In short, our view on the headline inflation profile is largely unchanged. However, its composition is quite different with a decline in tradables inflation expectations offset by more inflation in non-tradables.
"From the RBNZ’s perspective this will be disconcerting as it has stated in the past that if feels that non-tradables better reflects excess domestic demand over which it has some control.
"This is yet more reason to believe that the risks to our, and the Reserve Bank’s, interest rate track are weighted to the upside," Toplis says.
39 Comments
"Toplis says ongoing labour market tightness is "our greatest fear" in terms of the upward pressure on interest rates."
This is an absolutely nightmare. What would be worse than having more people working?
Looks like the RBNZ needs up their game with more than 50 bp each month to tackle this monstrous inflation.
There was a boom in the 1920ies also, low unemployment, the roaring twenties. When the OCR was hiked into an already falling stock market, credit dried up and the whole economy collapsed almost overnight.
We are seeing a repeat of that now. Lending has dried up. It is good that the overheated real estate market has fallen, but what we are seeing looks more like a crash than a correction. If this continues, it will bring the entire economy down, a great depression like after 1929.
Imagine explaining to aliens that our go to option for controlling prices in our more 'developed economies' is to... stop people working and make more people poor and desperate so that they compete for crap jobs. Might they question our definition of 'developed' or ask us what we understand about humanity?
What a dumb thing to say. If the idea here is to make some currently employed people unemployed... how would you describe those same people as 'unemployable'? They are literally working now!
And, the choice is not between inflation and unemployment. Economists made that crap up.
Take their job for granted?!? So people who apply for a job and do it are to blame for their job not being truly useful?
The best mechanism to reduce demand is to reduce overconsumption by people with too much money; most of whom don't do anything useful - they just extract rent from people that work.
Wow, you think that every person who is employed is literally working now?! No, every person who is currently employed is getting paid, whether or not they provide any useful output. Some of those employed is nothing but a huge drag on the productivity of those who are actually trying to get the work done. Society would be better off if those types are on bennies, rather than salaries.
Are you such a slave to the people who benefit from your labour? Do you genuinely believe that only people that you decree as doing useful work (that makes money for the masters) are useful? Jeez. The most useful job in our society is probably parenthood. Do you have children?
I agree and yet parents leaving young kids at daycare to "participate" in the economy is the ideal scenario.
Our relatively high workforce participation is celebrated by economists and policymakers, despite the fact that high living costs are a big factor here.
NZ has highest workforce participation in OECD, house prices get blame | Stuff.co.nz
I 100% agree that parenthood is the most useful job in society and I am lucky enough to have wonderful kids. I believe that in an ideal society, only one of the parents should need to be a full-time breadwinner.
I find it devasting to see kids essentially growing up in commercial orphanages nowadays. The cost of this to society is unparalleled. A temporary caregiver's aim is to hand back a healthy, happy-enough kid at the end of the day, week, term or year. Parents should be concerned about everything that will impact their kid over his/her lifetime, so their goals should be long-term goals. To a parent, a kid should be the most special kid in the world. To childcare organisations, the kid will always just be one more kid in their care.
My beef is with people lazing around in paid positions while holding back productivity due to their utter lack of work ethics. The experiences that prompted my previous rant came from working at a DHB where such people deliver a double blow to taxpayers, both by costing loads in terms of money to pay salaries but then also by putting patients at risk - not to mention the frustration factor of team members who are yoked to such 'workers' and who often end up burnt-out or resigning.
My beef is with people lazing around in paid positions while holding back productivity due to their utter lack of work ethics
Such jobs seldom end up on the chopping block when times are tough. That is because these workers (middle managers, change agents, etc.) decide where to budgets need to be tightened.
Frontline public workers got the worse of last year's decision to freeze pay. Not easy for nurses to join another DHB but bureaucrats can get a bigger paycheck from the Crown by simply moving to another agency down the road.
Dang it! Good point. And the Health Reform has just created a ludicrous number of additional bureaucrats without delivering anything, uhmm.. yet? (Let's be hopeful.)
Although in countries with higher unemployment, I'm sure those who have jobs generally work harder than in places where there is more work (or at least jobs) than people.
A way of looking at it is, some of the jobs that have been created, due to our overheated economy, would not have been created if the economy was not so overheated. So this is a re-balancing, e.g., Real Estate sales jobs. The Reserve Bank will probably go too far, but that's another discussion. You seem very anti increasing the OCR. What's your thoughts on how to fix the problem, because we do have a problem?
I am not sure whom you are asking Norm, I thought I'd respond. I agree we had an overheated economy which needs rebalancing. Too many people working in real estate, as you said.
Yes, the Reserve Bank probably is going too far. They helped create this mess by lowering the OCR too much, to 0.25. Now, they are triggering outright disaster by increasing the OCR tenfold, to 2.5, and possibly more. When people had borrowed at 0.25, they can't afford the current rates.
Yes, we do have a problem after years of money printing and an ultra-low OCR. To fix it, one or two careful OCR hikes, then waiting some six to nine months to see how this affects the economy, would have been prudent. Instead, the aggressive approach now will lead to total collapse.
Notably, the inflation problem cannot be solved, unless total collapse is desired. The Dollar had already been devalued by money printing, its original purchase power cannot be brought back.
Except that inflation isn't prudent.
What would help would be:
1. An honest inflation measure, as opposed to the cherry-picked CPI we have now.
2. More frequent analysis.
3. Finer-grained controls.
As I've said before, if we'd measured inflation in house and other asset prices (economic glugs sucking the lubricant (money) out of the economy) the interest rates would never have dropped as low as they did. If we'd been responding in a timely manner, we'd see faster responses - its precisely because we don't that we have these massive delays. If we responded faster, we'd be able to use smaller increments (though why we stick to 25pt multiples I don't know). All of this would help.
As it is, we have a system where it's pretty obvious the poles are far into the unstable zones (from a discrete control theory perspective). We have the technology to be better, and it's to the RBNZ's shame that it's still run like data comes via the monthly stagecoach.
I'd be interested to see if anyone has modeled the OCR/CPI through z-space with the RBNZ's current settings - anyone have a reference?
I think people are under rating the luck in this. Yes inflation is probably not to bad all of a sudden but how much of that was too do with luck re: grain shipments and easing globally of commodities by a staggering 30 % (copper).
Maybe the RB has taken an educated approach and maybe slightly overshot.but its a huge global change. If the UKR conflict had heated up and grain was not cleared and gas was cut to Europe and the US was buying metal hand over fist to make weapons I think we would have much higher inflation and be glad of a slightly higher ocr.
LOL - Yet another economist saying workers should bear the burden of inflation through increased unemployment and wage increases that are well below inflation. Why should workers accept that?
I’ve read several articles on this site saying business enjoyed massive increases in their profits during Covid, and many also accepted large government subsidies. I’m now waiting for an economist or business owner to say firms need to suck it up, not increase prices and accept lower profits.
You state correctly that some businesses benefitted massively from money printing and COVID support. This is wealth redistribution, effectively taken from money deposit holders as their purchase power has decreased. "Why should workers accept that", you ask. Why have workers voted for a government that ended up throwing money around, devaluing savings, I ask.
There is no easy solution to this now. The previous purchase power of money deposit holders will not return.
a) One could accept the inflation that has resulted from money printing (soft landing).
b) Or, via massive OCR hikes, crash the entire economy to achieve a great reset with even more government control.
Shit -- i agree with BNZ economists -- need drugs quickly! -- But wait -- there are 4000 nurse vacancies in Auckland alone!
About time someone realised that have the reason for lack of business confidence is that they cant actually find any staff never mind good staff currently. And before everyone starts screaming pay more pay more -- there are not 4000 unemployed nurses looking for work in Auckland -- even if we doubled there pay across all agencies -- we would still have 4000 vacancies!
If inflation is 7% wages needs to be up 9% can only see inflation staying high people have to pay bills what is the point of people on minimum wage working if they cannot pay rent and bills, looks like wheels are coming of the economy. Banks will also be hit as over leveraged go bankrupt first will be building companies then unprofitable businesses as house prices crash people will just stop paying mortgage if cannot afford food.
I disagree with Toplis.
I think the unemployment rate will be close to 4% by year’s end, rather than 3%, and will surge to circa 5% by May 2023. I struggle to see how the OCR hiking path he projects will not start delivering employment pain, especially in the construction sector which will prove very susceptible to ongoing interest rate hikes.
For me the massive elephant in the room is the Aussie economy. It’s construction sector, in particular, is in strife. I could see a reasonable number of out of work kiwis returning to NZ later this year, and struggling to find work here. And fewer kiwis migrating there.
To get inflation to fall demand has to fall to a level where there is more availbility of stuff than people to buy that stuff.
At the moment we all want soooo much stuff that businesses cant hire enough people to make it and sell it to us fast enough.. the more people they hire the more stuff gets bought.. viscious cycle. Trouble is all the good peeps got hired already so now they have to hire the last peeps in the job queue who arent really motivated to work..
We all want inflation to drop so we all need people buying less stuff. For that to happen we need to remove money from the system so we cant afford more stuff.. presto we raise our ocr so peeps cant borrow as much, or if they do they have to spend money paying interest instead of buying stuff. Then finally businesses need less people to make and sell stuff.
The reason peeps are leaving is coz everything is to expensive. Pushing up the ocr reduces house price and stops inflation ...so stuff gets cheaper and people stay and more people want to come here.
Alternatively we could all agree to just stop buying stuff and sell our houses for less. But we wont. So we have to be forced to do it for our own good.
Crazy things humans.
Don't we need to give things a bit of time to start working? Increasing interest rates and then one month later saying oh it's not working raise them again seems foolish. It could take one or two years for higher mortgage interest rates to have an economic effect.
People should start becoming a little more minimalist. I'm still seeing the malls packed with shoppers on the weekend and during the week for that matter. Start getting ready for a lower standard of living. Start preparing for an apocalypse right now. It may not be too bad but the end result will be that you have more reserves and less rubbish in your life.
Fingers crossed the unemployment rate climbs aye lads...lol.... I sort of see what the folk at the BNZ are hopeful of but its very difficult to see the unemployment rate climbing when there are an abundance of staff shortages throughout the nation. Covid itself has probably assisted in lowering the unemployment rate as cover is bought in for those afflicted. We have an aging populace and many folk that probably should be retired are hanging in there because they have the skillsets that newbies just dont have. Halting the rise of the OCR wont be simple , however it will be a very complex task to achieve significant OCR rises without causing collateral damage to the economy . Inflation touted at 7% is probably closer to 10% if we line it up against the devalued dollar (past 12 months) .
Then we have wages that just arent able to keep up with the day to day cost of living for many so essentially there are low income earners that will be feeling the heat as mortgage holders. This means that raising the OCR will be somewhat restrained by the risk it creates . Hard not to think of the 2007-8 GFC when we sample some of what is going on here, back then the OCR was 8.25% (26.7.2007). Maybe we are sitting pre 2007 presently but clearly the heat is going on mortgage holders and that will mean less surplus to divert elsewhere, compounding this is the low wage economy comparative to the recent inflation realization we are experiencing . Its not just mortgage holders that will be feeling the heat either, renters will be anxious about what might come (talk of rent caps) . Hard not to envisage upward wage pressure further driving inflation as the need to offset such would result.
Outside forces are compounding issues Ukraine and China ,mix that with stock and share values that have themselves enjoyed YOY gains but may not be as valued as they purport. The problem with having schemes like Kiwisaver and the such world over is that these markets become a dumping ground for parking surplus assets on the premise that they will constantly increase in value...as such the companies themselves may not be as fit for purpose as many think. Luckily the markets are regulated and can be halted if it all starts to go pear shaped..(software issue at the exchange..lol) One lesson that can be learned from what is happening is that strategies can fail and that prudent and wise persons count on failure to improve their position....
The other lesson that can be learned is that its nice to hear from the banks about how bad things might get if something different doesnt happen (unemployment hike) but lets keep in mind if they hadnt created and promoted all of this debt...We wouldnt be discussing what might go wrong...lol Last thought is perhaps the RB should have aimed at maintaining a 5% OCR instead of measuring other parameters ... a default position might give it more ability without causing chaos... The bad news for all is the current 2.5% OCR is well short of where it needs to be, I guess the RB is going softly softly ....lol
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