Jobs growth has slowed; RBNZ ‘should’ cut

Jobs growth has slowed, and may stall into 2020. RBNZ ‘should’ cut.

Key Points

• The unemployment rate rebounded to 4.2%, after a surprise fall last quarter. As there was a surprisingly large 6k jump in the number of people unemployed.

• The labour market is losing momentum. Annual employment growth hit a six-year low, reaching 0.9%yoy in 3Q, as a slowing economy weighs on firms hiring decisions.

• There was decent wage growth in the third quarter, mainly out of the public sector, as several collective pay deals for frontline public servants came through.

• Optically, there is limited slack in the labour market, with the underutilisation rate falling heavily in the quarter. But the direction of a slowing labour market suggests that slack will lift from here.

• The RBNZ can still claim it’s meeting the maximum sustainable employment mandate for now. But the labour market is likely to weaken further in coming quarters. We still believe the path of least regret for the RBNZ is to deliver a 25bp cut next week.

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Summary

Employment growth continues to dry up as firms are less eager to hire in the face of a slowing economy. Today’s labour market report released by StatsNZ was all about pay. Payback from a surprisingly solid June quarter print, the Government Paying up for frontline public service workers, and the RBNZ should Pay heed to a deteriorating labour market and cut the OCR next week. The unemployment rate rebounded to 4.2% from the 11-year low of 3.9% last quarter. Because of slowing employment growth and a surprisingly large 6,000 rise in the unemployed. All part of the slight lift in the participation rate to 70.4%.

Wage growth lifted to show a further gain in the real incomes of Kiwi households. The private sector Labour Cost Index (LCI) – the RBNZ’s preferred measure – lifted 0.6% qoq, which followed the 0.8%qoq minimum wage induced jump in Q2. On an annual basis, the LCI was 2.3%yoy, well above the 1.5%yoy rise in the CPI over the same period. The big gains were recorded in the public sector. The public sector LCI jumped 1.3%qoq to 3.0%yoy. The recent pay settlements for police staff, nurses and teachers were picked up in the third quarter.

The labour market might be consistent with the RBNZ’s maximum sustainable employment mandate for now, but this is unlikely to last. The unemployment rate at 4.2% is close enough in terms of full employment, and there was a solid fall in the underutilisation rate to an 11-year low of 10.4%. However, looking ahead the labour market is likely to cool. Firms’ hiring intentions are tracking well below business confidence survey averages and economic growth is likely to slow further in the near term. The risks to maximum sustainable employment are still skewed to the downside. The 75bps of cuts delivered so far this year has failed to buoy the outlook of businesses.

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