Wage Growth Eased To Slowest Rate In Nine Years

New Zealand: Wage Growth Eased To Slowest Rate In Nine Years

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Rising unemployment and fewer working hours drove private sector labour costs lower in New Zealand in the December quarter. The private sector labour cost index, which of the various wage measures receives most attention from the RBNZ, rose 0.3%q/q as expected in 4Q (J.P. Morgan: 0.3%, consensus: 0.4%), compared to 0.4% in 3Q. From a year earlier, wage inflation eased to its slowest rate since 1Q01 (1.6%oya from 1.9%).

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The moderation in wage growth fits in line with our forecast that unemployment probably rose sharply in 4Q. On Thursday, we expect data to show that employment contracted 0.4%q/q in the final three months of last year. This, combined with an uptick in the labour force participation rate, will mean that the unemployment rate will jump 0.7%-points to 7.2%. Despite the sharp rise, the good news is that the Kiwi unemployment rate is, on our forecast, close to peaking, with the key rate expected to top out at 7.3% in the current quarter.

The Quarterly Employment Survey, also released today, showed that demand for labour continued to decline in the latter three months of the year. Employment, as measured by the number of full-time equivalent employees, decreased 2.5%oya, the number of filled jobs fell 1.7%, and total paid hours decreased 1.8%. The significant improvement in business confidence of late and the associated increase in hiring intentions signal improvement in these indicators in coming quarters.

The improvement in labour market conditions we forecast in 2010 (wage growth to pick up as employment and number of hours worked increase significantly) will add upward pressure on inflation. Although RBNZ Governor Alan Bollard appeared comfortable last week (in the statement accompanying the OCR announcement) with the medium term inflation outlook, we believe this comfort level will soon abate. Our forecasts project that annual CPI inflation will edge toward the top end of the RBNZ’s 1%-3% target range over the medium term as domestic prices rise and excess capacity continues to diminish. This reinforces our view that the RBNZ will hike the cash rate in April, before official guidance suggests.

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ENDS

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