A stonkingly good September employment report more than made up for the disappointment of the prior quarter. Employment surged 2.2% in the quarter following the small -0.1% contraction in June. One wonders if the survey changes in June 2016 are playing havoc with the seasonal adjustment. But then the annual rate of employment growth of 4.1% (which should be immune from seasonal adjustment challenges) is nothing short of spectacularly strong.
Since the survey changes in 2016 we have tended to focus on the unemployment rate as the more reliable indication of labour market conditions. This week's report sees a continuation of the downward trend in the unemployment rate and a gradual tightening of labour market conditions. The unemployment rate fell to 4.6% in September, its lowest level since the Great Recession. The labour underutilisation rate of 11.8% was unchanged over the quarter but is down 0.5 percentage points from year ago levels, so it’s heading in the right direction.
The participation rate surged to a new record high of 71.1% in September. This, along with continued gains in working age population from net migration, means that much of the growth in jobs is being met by increases in the supply of labour. This is tending to subdue the decline in the unemployment rate that would otherwise be the case.
The Labour Cost Index (LCI) rose 1.9% in the year to September, boosted by the impact of the equal pay settlement for aged and disability care workers. Excluding this impact, the LCI rose 1.6% in the year, a sign of generally still benign wage and therefore core inflationary pressures.
Looking ahead, we continue to see solid GDP growth over the next year or two leading to continued demand for labour, though not at the same pace as we have seen recently. The last year has seen employment growth average 1.0% per quarter, and we see this stepping down to around 0.5% per quarter over the next 12-months.
Given our expectation that the participation rate MUST be close to peaking (warning – we’ve been saying this for a while now), combined with a slowdown in net migration flows (that could be accelerated by policy changes), we expect the unemployment rate to nudge closer to 4% over the next few quarters.
This continued tightening in the labour market is expected to lead to greater skills shortages and stronger wage growth. And of course the new Labour-led government has already flagged increases in the minimum wage that are higher than we had previously assumed.
Whether this is inflationary will depend on the extent to which businesses pass on higher wage costs into retail prices, but also the extent to which firms now turn to plant and equipment investment to resource the future growth in demand for their goods and services. We have been looking for this to occur for some time as the labour market tightens and recent investment growth numbers are positive. This should lead to a cyclical improvement in productivity which will help keep inflationary pressures at bay.
Right now, we see no reason to change our view that the Reserve Bank of New Zealand has time on its side before beginning to raise interest rates. We still have end of next year pencilled in, but there’s a lot of water to flow under the bridge between now and then, including likely changes to the Policy Targets Agreement and a new Reserve Bank Governor. Watch this space.
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