Liam Dann: Why good jobs data could point to higher interest rates

Did the economy create more jobs than it lost? We will find out tomorrow. Photo / NZME

Economists say the unemployment rate almost certainly rose in the final quarter of 2020.

But when new numbers (for the 4th quarter) are released tomorrow, there will be more focus on possible good news than bad.

That is because if the unemployment rate comes in better than expected, financial markets are likely to see it as inflationary and apply upward pressure to interest rates.

The current market consensus is for the rate to rise from 5.3 per cent to 5.6 per cent.

"We believe the market would be sensitive to a much stronger labour market report than a softer report," says BNZ's Jason Wong.

"A soft report would be looked-through, while a strong report could see tightening expectations brought forward, albeit still likely an event for 2022."

A flat result or unexpected fall in the unemployment rate could see a significant market
reaction, with the market likely to price in at least one full tightening next year and trigger a reaction right across the swaps curve, he said.

Sydney-based Capital Economics has been one of the most bullish on the prospects for inflation rising and pressure going on interest rates in the coming year.

Economist Ben Udy notes that New Zealand's underlying inflation picked up sharply in the final three months of 2020.

"We expect strong house price growth and a tightening labour market to support inflation to rise even further in the years ahead," he said.

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"Taken together with our forecast for the solid rise in GDP growth to be sustained and the labour market to tighten ... the outlook is looking solid. We now expect the RBNZ to tighten policy by ending QE later this year before raising rates late next year."

Capital Economics is forecasting strong economic growth in this calendar year - a 6.5 per cent lift in GDP - compared to consensus forecasts of 4.6 per cent.

On that basis, it recently tipped New Zealand's central bank to be the first advanced economy in the world to raise interest rates, likely in 2022.

"The strength in business surveys makes us think that the end of the wage subsidy scheme was not a significant drag on employment in [the fourth quarter]," Udy said.

Unemployment would rise to 5.6 per cent "but thereafter strong demand for labour, as shown by high job ads, will bring the unemployment rate down once more".

While that's in line with the consensus, most other economists are less optimistic longer-term, expecting the rate will continue to rise to around six per cent by mid-year.

Despite that, the outlook for New Zealand's labour market had brightened, said ASB senior economist Mike Jones.

"Outright declines in employment appear to be behind us," he said.

"We still expect unemployment to rise further from here, but that is more a function of job creation failing to keep pace with the growth of the labour force, rather than mounting job losses."

However, there were still some stark regional and sectoral differences, and pockets of weakness, he said.

"But, at a macro level, the timely deployment of the wage subsidy, and various other support measures, appear to have mostly done the job in allowing firms to hold onto workers until we got to 'the other side'."

Reserve Bank Governor Adrian Orr. The RBNZ will be watching jobs data for signs of inflation. Photo / Mark Mitchell

So for the Reserve Bank and financial markets, that meant interest would centre on what the data meant for the Bank's Maximum Sustainable Employment (MSE) objective, he said.

MSE was added to the Reserve Bank's mandate in 2019. It is in addition to its goal of keeping inflation within 1-3 per cent target range.

"With this, it will be important to look across a range of indicators of labour market slack (underutilisation, hours worked per person, as examples) to get the full picture, given the often treacherous volatility in the Household Labour Force Survey measure of
unemployment, Jones said.

Stats NZ will release all the data from its fourth-quarter Household Labour Force Survey (HLFS) at 10.45am tomorrow.

The survey, which has provided the official unemployment figure since 1986, polls 15,000 households (about 30,000 people) across 13 weeks to generate an average for the quarter - rather than a set point in time.

To be categorised as unemployed by Stats NZ, a person must:

• Not have a job.
• Be available to start work.
• Have been actively seeking work in the past four weeks or be due to start a new job in the next four weeks.