I was a tad apprehensive about this week’s Household Labour Force Survey (HLFS). Seemingly every day we are hearing about how grumpy the business community is and the implications for hiring and investment. The good news is that firms were still hiring, at least they were up until the end of the June quarter.
Employment growth (the key downside risk when business is in a funk) came in a tad stronger than market expectations at +0.5% over the June quarter. The annual rate of growth jumped to +3.7%, up from 3.1% in the year to June.
The volatility in the annual rate is due to base effects as quarterly employment growth can be a bit bumpy. The increase in the annual rate was due to -0.1% qoq employment growth in the June quarter of last year dropping out of the annual calculation.
Next quarter a whopping +2.2% qoq drops out of employment growth which we expect will see the annual rate of employment growth drop to around 2.0%. Sounds like a big drop but think about it this way: if GDP growth is still running at around 2.5-3.0% (our assumption for now) and productivity is running at 1%, then we can reasonably expect annual employment growth to slow to 1.5-2.0%.
We’re not reading anything into the tick-up in both the rates of unemployment (from 4.4% to 4.5%) and underemployment (from 11.9% to 12.0%). With labour force growth matching employment growth, these outcomes were a function of a further increase in our already stellar participation rate which rose from 70.8% to 70.9%. That’s a sign of a healthy, well-functioning labour market.
On the wages front, private sector ordinary time Labour Cost Index (LCI, unit labour costs) was up +0.6% qoq, elevated from recent quarters but reflecting the recent increase in the minimum wage. Wage growth in the Quarterly Employment Survey was softer, but we prefer to focus on the more reliable LCI.
Wage growth and core inflation are inextricably linked so it should be no surprise that as wage growth is beginning to rise, so too are (some) measures of core inflation.
Overall this was a solid result for this stage of the cycle and especially given the funk the business community is in, though it’s still early days in terms of how this plays out.
The New Zealand economy is at a critical point in the cycle. The cycle is maturing (slowing), but inflationary pressures are building. Both are entirely consistent with a capacity-constrained economy.
The detail of the HLFS report suggests upside to our June quarter GDP pick of +0.6%, but that’s history. At the same time we are not getting pessimistic on the growth outlook. Looking ahead there are still a few important supports for growth. Population growth is still strong (albeit off its peak), the terms of trade are high, fiscal policy is easing and consumers remain more upbeat than businesses.
But how long New Zealand can maintain reasonable growth in the face of rising costs and capacity constraints depends on the decisions firms make, particularly around investment.
Regular readers will know we have been upbeat about the potential for some improvement in productivity this cycle, largely because the cost of capital is so much lower than it has been at similar points in the cycle in the past.
But that requires businesses to have the confidence to invest. Ultimately that comes down to why businesses are grumpy, and what they do about it. The reasons for the grumpiness have become myriad:
- policy uncertainty;
- the cost impost of known policy changes (minimum wages);
- the impact on profitability of rising costs generally and the inability to pass those cost increases on;
- the perceived absence-of-due-process policy decision around oil and gas;
- concern about the rising tide of protectionism globally;
- capacity constraints;
- access to credit; and
- the strength of domestic demand.
How businesses respond to these challenges will be the critical factor and only time will tell how this plays out. But that makes things interesting for the Reserve Bank as they put next week’s Monetary Policy Statement together.
Our GDP growth forecasts have been lower than the RBNZ’s for some time. Over the period March 2019 to March 2021 we are expecting average GDP growth of 2.7% per annum compared to the RBNZ’s 3.1%.
Remember the important consideration for the RBNZ is not the absolute level of growth but growth relative to its non-inflationary potential. From an inflation/OCR perspective, lower absolute growth is offset by the fact that we expect potential growth is also lower (growth in working age population and business investment).
The bottom line is that while we think the RBNZ is at the optimistic end of the spectrum on growth and may lower their forecasts, we still think the next move in the OCR is up, but not anytime soon. Stay tuned.
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