New Zealand jobless rate falls in Q1 2019, further wage growth likely to be gradual

New Zealand jobless rate fell to 4.2 percent in the first quarter of 2019. This was a bit lower than market expectations. Nevertheless, the details of the release were weak – employment actually dropped in the quarter, but this was countered by fewer people participating in the workforce. The underutilization rate dropped to 11.3 percent, a rebound from the 11.9 percent seen one year ago.

Lately, the jobless rate has been volatile; however, it appears clear that the labor market has lost momentum. According to Statistics New Zealand’s measure of the trend jobless rate rose to 4.3 percent – only a bit lower than one year ago, after many years of solid rebound. The data released today shows that the labor market has lost momentum, and further rebound appears unlikely in the near term, with GDP growth weak, noted ANZ in a research report.

Nevertheless, in spite of the deceleration in momentum, the labor market, at present, is in good shape and the Reserve Bank of New Zealand is expected to continue to assess employment as being close to its maximum sustainable level. Companies are finding it difficult to find both skilled and unskilled labor. However, the labor market lags the overall activity cycle, and the current degree of tightness shows past strength in the economy.

“Looking forward, it looks like it will be increasingly difficult for the economy to grow above trend. Today’s data release adds to the case that capacity pressures are past their peak, which doesn’t bode well for the inflation outlook”, said ANZ.

Employment growth was subdued. Growth in HLFS employment continues to ease fairly abruptly. Annual employment growth dropped to 1.5 percent year-on-year from 2.3 percent, in line with the recent slowdown in GDP growth. HLFS employment data has been volatile lately, but it is notable that first quarter’s 0.2 percent quarter-on-quarter falls follows on the heels of a soft 0.1 percent quarter-on-quarter print in the fourth quarter.

A fall in the participation rate resulted in the lower jobless rate, explaining the divergence between the strong jobless rate figure and soft employment growth. The participation rate dropped to 70.4 percent from 70.9 percent after being widely stable in the past year, following many years of solid rises in participation.

Meanwhile, hours worked measures are significant indicators of economic activity and slack. QES hours paid give a partial measure for parts of GDP, and tend to track annual GDP growth well over history. In the first quarter, QES hours paid rose 0.3 percent quarter-on-quarter, with the annual growth rate unchanged at 1.9 percent year-on-year. The outturn implies slight downside risk to the current forecast of 0.5 percent for the first quarter GDP growth, said ANZ. Meanwhile, HLFS hours worked recorded a strong 4.9 percent quarter-on-quarter rise, recovering from a subdued previous quarter.

Wage inflation came in weak. The private sector Labour Cost Index rose 0.3 percent quarter-on-quarter, whereas it remained flat at 2 percent year-on-year. The rise in the minimum wage in April 2018 continues to give a boost of around 0.2 percentage points year-on-year, including some spill-over effects.

“Modest wage inflation partly reflects the subdued inflation environment, with real wages generally growing around average recently. We expect further increases in wage growth to be gradual, with the peak in capacity pressures now behind us. However, the risks are tilted to the downside should weakness in GDP growth spill over further into the labour market”, stated ANZ.

Continued weak wage inflation implies that tightness in the labor market that has been enough to lift underlying wage inflation higher.

At 05:00 GMT the FxWirePro's Hourly Strength Index of New Zealand Dollar was slightly bearish at -58.127 while the FxWirePro's Hourly Strength Index of US Dollar was bearish at -74.8579 more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex