Economists say unemployment data may allow Reserve Bank Governor Adrian Orr to slow the pace of rate hikes. Photo / Mark Mitchell
Economists say unemployment data may allow Reserve Bank Governor Adrian Orr to slow the pace of rate hikes. Photo / Mark Mitchell
The first signs that the labour market might be softening have emerged, with unemployment rising slightly in the fourth quarter of 2022.
The change - from 3.3 per cent to 3.4 per cent - was slight but it was enough to have economists locking in a 50-basis-point (bp) hike forthe Official Cash Rate (OCR) this month - rather than the 75 basis points the Reserve Bank (RBNZ) had initially been projecting.
Economists had expected the labour market to hold steady or even fall slightly through the quarter.
“Risks are now skewed towards the RBNZ having to hike the OCR by less than previously thought,” ASB senior economist Mark Smith said.
“The need for outsized OCR hikes also looks less urgent. We now expect the RBNZ will hike by ‘only’ 50bp in February, though it remains a fine line between that magnitude and a 75bp increase.”
The ASB expects the OCR will peak at 5.25 per cent. It currently sits at 4.25 per cent.
Others went further. BNZ economists shifted their pick for the OCR decision on February 22 to 50 basis points and also lowered their expected peak to just 5 per cent (from 5.5 per cent).
Wage growth, despite running at record or near record levels, also showed some signs of having peaked.
In the year to the December 2022 quarter, all salary and wage rates (including overtime), as measured in the labour cost index (LCI), increased 4.1 per cent, compared with 3.7 per cent in the year to the September 2022 quarter.
This was the largest annual increase since the LCI series began in 1992.
But it was still slightly lower than the RBNZ had forecast.
The LCI is often compared with the Consumers Price Index (CPI), Stats NZ said.
It shows how wage cost inflation for businesses compares with consumer inflation (that is, the change in prices of goods and services bought by households).
It is not a direct comparison between household income and cost of living.
The other key measure of wage growth - average weekly earnings (including overtime) per fulltime equivalent employee, as measured by the Quarterly Employment Survey (QES) - increased 7.6 per cent in the year to the December 2022 quarter.
Average ordinary time hourly earnings in the QES also increased, up 7.2 per cent, reaching $38.19 in the December 2022 quarter.
“This is the second-largest annual rise since the series began in 1989, surpassed only by the 7.4 per cent annual increase in the previous quarter,” Stats NZ said in a press release.
ASB economist Mark Smith.
ANZ described the wage growth data as “mixed”.
It still showed a labour market beyond “maximum sustainable employment” but some “signs of softening” were beginning to show, economist Finn Robinson said.
“As we look to 2023, timely indicators point to a significant easing in labour market pressures, with job ads, monthly filled jobs growth, and employment intentions all easing significantly in recent months,” Robinson said.
Employment growth was a little softer than expected, Kiwibank economists noted, up 0.2 per cent in the quarter, meaning only a small rise in annual employment growth to 1.3 per cent was recorded.
“The slowdown in employment growth in part reflects the inability of firms to fill vacancies,” said Kiwibank economists.
“Labour shortages continue to constrain firms’ activity. Looking ahead, the quick turnaround in net migration should help resolve the shortage of labour supply.”
However, there was now a question mark hanging above labour demand.
Forward indicators suggested that demand is waning.
“The outlook for the economy is dimming,” the Kiwibank economists said.
There were also some early signs that the opening of borders and the arrival of more immigrant workers was easing pressure on the labour market.
The under-utilisation rate - a broader measure of spare labour capacity which includes those unemployed, underemployed, and the potential labour force - rose to 9.4 per cent, from 9.0 per cent last quarter, Stats NZ said.
“The primary contribution to higher under-utilisation came from increases in the potential labour force.”
Growth in the working-age population (and labour force) was expected to strengthen by the end of the year, given the turnaround in net immigration to New Zealand, said ASB’s Smith.
“Both of these drivers will act to push the unemployment rate to around 5 per cent by late next year, with employment moving below its maximum sustainable level,” he said.
“Wage growth is expected to peak this year but will decline next year as labour market capacity picks up and workers will have to compete for less plentiful work.”
Today’s data suggests we may be reaching the turning point in the labour market sooner than anticipated.
“However, the battle on inflation is not yet won,” Smith said.
“The RBNZ is unlikely to shirk from OCR hikes and a period of restrictive monetary settings until it is confident it is on top of inflation.”
