NZ Wage Inflation Subdued in Third Quarter

Published: Tue 3 Nov 2009 03:19 PM
* Wages grew 0.4%q/q in the September quarter
* Labour demand continued to decline
* Employment report Thursday the main focus
Private sector labour costs (as measured by the LCI) in New Zealand rose a slightly faster than expected 0.4%q/q in 3Q (J.P. Morgan and consensus: 0.3%). From a year earlier, wage inflation moderated to just 1.9%oya, the slowest rate since early 2001, from 2.6% in 2Q.
With respect to the monetary policy outlook, today’s numbers alone have few implications. To view pertinent graphs click on the following link: Thursday’s 3Q employment numbers are, however, an important milestone on the monetary policy front. With the unemployment rate rising, and wage growth subdued, the RBNZ will afford itself some time to sit on the policy sidelines. Our forecast is for the unemployment rate to jump from 6.0% to 6.7% (consensus 6.4%), inflated to some extent by an elevated level of labour force participation, which we expect will nudge up to 68.6%. Underemployment will remain near a 10-year high, which will remain a key policy concern.
The Quarterly Employment Survey also released today showed average hourly earnings spiking 1.7%q/q in the private sector in 3Q. Reflecting the underlying weakness in the labour market, however, demand for labour continued to decline, particularly in the manufacturing sector. The number of full-time equivalent employees (-3.5%oya), filled jobs (-2.6%), and total paid hours (-3.0%) all fell for the fourth straight quarter.
The RBNZ last week shifted to a neutral policy stance, signaling that the OCR will remain unchanged until 2H10, with the RBNZ seeing no “urgency” to withdraw the monetary policy stimulus. Our forecast calls for Governor Bollard to deliver the first rate hike in mid-2010, although we acknowledge the risk of an earlier move if the housing market indicators continue to firm and the labour market fails to deteriorate as much as expected. If these domestic indicators prove to be stronger than expected, Dr. Bollard will tighten policy earlier to hamper the prospects of another consumer spending spree.

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