Unemployment Rate At Nine Year High

Unemployment Rate At Nine Year High

·         Employment contracted 0.8%q/q

·         Unemployment rate jumped 0.5%-points

·         Hours worked continued to fall

Employment in New Zealand shrank 0.8%q/q in 3Q (J.P. Morgan and consensus -0.3%), double the pace of contraction recorded in the previous quarter. Marking a prolonged period of deterioration in the New Zealand labour market, employment now has contracted for seven straight quarters, pushing the jobless rate from just 3.8% in 1Q08 (when the recession got underway) to 6.5% in 3Q.

A fall in the participation rate (from 68.4% to 68.0%) meant the rise in the unemployment rate was not as sharp as we had forecast. Unemployment jumped from 6.0% to 6.5% to the highest level in nine years, though we had looked for a higher participation rate to inflate the unemployment rate to an even higher 6.7%. The participation rate, though, fell in 3Q, slipping 0.4%-points to its lowest level since 1Q08, partly “owing to a decline in the number of people in the labour force”. Nonetheless, the 0.5%-point rise in the unemployment rate was significant.

The details of the employment report painted a picture of a weakening labour market. The number of unemployed rose by 12,000 to reach 150,000, the highest since 1Q94, and hours worked fell 0.7%q/q. Even more indicative of the weakness in the labour market was the increase in the number of people underemployed. According to Statistics New Zealand, of the 499,800 people employed part-time in 3Q, 24% preferred to work more hours, up from 22% in 2Q, and up from 16% in the same quarter a year earlier.

With respect to monetary policy, today’s weak labour market report doesn’t necessarily buy the RBNZ more time to sit on the policy sidelines, but neither does it create a sense of urgency to tighten policy sooner. Governor Bollard has pledged to keep the OCR “at” the current level until 2H10, seeing no “urgency” to withdraw the monetary policy stimulus. That said, a sustained string of firmer consumer-related data going forward could prompt the RBNZ to tighten policy sooner than 2H10. In recent commentary, Governor Bollard has highlighted the increase in household spending and the pickup in the housing market, both of which could, if sustained, encourage another debt-fuelled household spending spree.

Our forecast remains that the next tightening cycle will kick off with a 50bp rate hike in July 2010, but a stronger-than-expected run of consumer related data (particularly related to the housing market) would increase the chances of an earlier OCR hike.

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