The seasonally adjusted unemployment rate was 3.4 per cent in the December 2022 quarter, compared with 3.3 per cent last quarter, Stats NZ said today.
That was slightly higher than market expectations and most economists’ forecasts and may mean the Reserve Bank can moderate its interest rate hikes.
The BNZ today lowered its forecast for this month’s OCR hike to 50 basis points - from 75 basis points.
It also lowered its forecast peak track to 5 per cent, from 5.5 per cent.
But wage growth was still strong and the RBNZ won’t be able to relax yet.
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 is the largest annual increase since the LCI series began in 1992.
ANZ market strategist David Croy said the data very much steers the market in the direction of a 50 basis points hike.
“The big picture here is that inflation and labour data are both stronger than the Reserve Bank would like, but the trends are moving in the right direction, so they can afford to slow down the pace of tightening,” Croy said.
The New Zealand dollar and wholesale interest rates fell as the markets perceived the date as being soft enough to support views the Reserve Bank would raise the official interest rate by just 50 basis points later this month, not by 75 as previously suggested.
By late morning, the NZ dollar was down by 20 basis points at US64.40c while the key two-year swap rate had dropped by 8 basis points to 4.92 per cent.
Some economists had expected the official unemployment rate to dip back to a record low for the year to December 2022.
Westpac and Kiwibank economists picked unemployment to hold steady at 3.3 per cent.
Others, like ASB and ANZ, expected it would fall back to its record low of 3.2 per cent.
However, all the economists note that picking the exact number is probably more art than science. The real focus will be on the details of the data.
That means looking at the ongoing strength of employment and the extent to which wage costs have continued to rise.
The underutilisation 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.
The primary contribution to higher underutilisation came from increases in the potential labour force.
The LCI is often compared with the consumers price index (CPI). This 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 full-time 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,” StatsNZ said.
Economy ‘close to turning point’
Broadly, there are expectations rising interest rates will slow the economy and push unemployment up over the year.
That should reduce demand in the economy and see inflation fall back to more normal levels.
“The labour market tends to lag the broader economic cycle, and the resurgence of wage inflation in particular likely has further to run,” said Westpac acting chief economist Michael Gordon.
But the economy was close to a turning point, said ASB senior economist Mark Smith.
“The demand for labour, while insatiable for much of 2022, is expected to cool over 2023.
“Pending recession for the New Zealand economy [we expect a circa 1 per cent contraction in GDP from mid-2023] should result in firms scaling back their demand for labour. This looks to be occurring.”
MBIE job ads had sharply cooled towards the end of 2022, with unadjusted job ads in December at their lowest level in two years, he noted.
Kiwibank also sees employment intentions starting to weaken after job ads fell late last year.
“We are forecasting the unemployment rate to begin lifting from around the middle of the year on its way to 5 - 5.5 per cent in 2024,” chief economist Jarrod Kerr wrote.
“The heat is expected to start coming out of the labour market in the second half of 2023. It has to for inflation to retreat.”