New Zealand Labour market lags recovery

3 November 2011

For immediate release

New Zealand Labour market lags recovery

Employment was weaker than expected in Q3 but still positive. Jobs rose by 1.1% y-o-y (vs. consensus of 1.6%) and the unemployment rate ticked up to 6.6% (vs. 6.4%). Keep in mind that employment tends to lag activity and GDP turned the corner at the start of the year, so there is still a bit more upward momentum in the pipeline. Besides, 2H also gets a kick from the Rugby and the rebuild of Canterbury is yet to come. Nonetheless, last week’s low CPI and today’s softer employment numbers do mean there may be less rush for the RBNZ to normalise policy, particularly given heightened global risks.

Facts
- The unemployment rate ticked up to 6.6% in Q3, from 6.5% in Q2, (consensus was 6.4% as was HSBC’s forecast).
- Employment increased by 0.2% in the quarter and by 1.1% y-o-y.
- The participation rate rose to 68.4% from 68.3%.
- Actual hours worked has risen by 2.3% y-o-y, which is up from 1.1% six months ago.
- Earlier in the week, the labour cost index showed that wages are on a modest upward slide, rising by 2.0% y-o-y, up from 1.8% six months ago.

Implications
Employment growth was weaker than expected, there is no denying that.

And if you look at the collection of labour market data we have received this week it is fair to conclude that the recovery in the labour market is pretty slow on the uptake.

But employment of new staff tends to lag economic activity, mainly because firms are often reticent to take on new hires until they are confident that a recovery is in progress. What they tend to do first is ramp up hours worked. Today’s report confirmed that this is happening.

Actual hours worked increased by 2.3% y-o-y, up from only 1.1% six months ago. The quarterly numbers are even more convincing, with strong growth in hours worked in both Q2 and Q3, following flat outcomes in the previous two quarters.

Looking forward, we also still expect to see H2 get a solid kick along from the Rugby World Cup. And, the reconstruction of Canterbury is only just getting started, and will provide a significant boost to activity.

Plus the business surveys are still generally pretty positive, particularly about employment prospects.

All in all, the Kiwi economy is still recovering: it’s just that the pace may be a little slower than expected.

Bottom line
Employment was weaker than expected, although hours worked have continued to rise. We still see that a recovery is in progress.

Our central view has been that RBNZ would hike before year-end, but these data and heightened global risks suggest the risk is that they may choose to sit still for longer.

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