The December quarter labour market surveys surprised modestly to the upside, suggesting that activity and inflation pressures are still easing, but perhaps not as quickly as the RBNZ would have hoped.
- Unemployment rate: 4.0% (prev: 3.9%, Westpac f/c: 4.2%, RBNZ f/c 4.2%)
- Employment change (quarterly): +0.4% (prev: -0.2%, Westpac f/c: +0.3%, RBNZ f/c +0.2%)
- Labour costs (private sector, quarterly): +1.0% (prev: 0.9%, Westpac f/c: +0.8%, RBNZ f/c +0.8%)
- Average hourly earnings (private sector, ordinary time quarterly): +0.5% (prev: +2.0%)
The December quarter labour market surveys produced some modest upside surprises, relative to what the market and the Reserve Bank were expecting. The unemployment rate rose from 3.9% to 4.0%, returning it to around its pre-Covid levels. The number of people employed rose by a solid 0.4%, though this was outpaced by the strong migration-led growth in the population.
The rise in the unemployment rate was less than the 4.2% that we and the Reserve Bank had forecast, although the reasons for the ‘miss’ were fairly minor. Employment growth was a little higher than the 0.3% we were expecting (but in line with the already-released Monthly Employment Indicator). At the same time, the labour force participation rate dipped to 71.9% – we had assumed an unchanged 72.0%, but we didn’t have a strong stance on that as it’s been quite volatile recently.
The unemployment rate in particular is a valuable real-time indicator of how hot the economy is running. The RBNZ has been looking to slow the economy to take the heat out of inflation pressures. And while activity is clearly cooling, the unemployment rate suggests that they haven’t made as much progress as they would have hoped at this point.
That said, the underutilisation rate – a broader measure of spare capacity in the labour market – saw a more substantial rise to 10.7%, from 10.4% last quarter and 9.3% a year ago. The rise this time was due to more part-time workers saying they would like to work more hours.
The other unwelcome surprise for the RBNZ was that wage inflation was also stronger than expected. The Labour Cost Index (LCI) rose by 1.0% for the private sector, against forecasts of a 0.8% rise. There was also another sharp lift in public sector pay rates, which may be a holdover from the health and education sector pay agreements that also boosted the previous quarter.
On an annual basis, private sector wage growth slowed to 3.9%, from 4.1% last quarter and a peak of 4.5% in March 2023. While wage inflation has clearly peaked in the private sector (though not in total, due to the large public sector increases), it has not receded as quickly as the RBNZ would have hoped. That in turn will have a bearing on its forecasts of how quickly inflation will return to within the 1-3% target range.
Overall, today’s results will probably reinforce the RBNZ’s stance that interest rate cuts are much further away than what the market is currently pricing in. While its November Monetary Policy Statement forecasts are somewhat dated by now, the recent speech by Chief Economist Paul Conway suggested that the RBNZ has not wavered in its concerns about the risk of inflation remaining stubbornly high.
