Unemployment figures expected to show labour market 'as tight as a drum'

Friday, 29 July 2022

The official unemployment rate is based on a survey by Stats NZ. To count, people must have actively looked for work in the previous four weeks.

Banks expect Stats NZ will report unemployment has fallen to about 2.8% to 3.1%
Some believe a low figure could tip the Reserve Bank to raise the OCR by 0.75% next month
Despite the tight labour market, wage rises are expected to continue to lag inflation

Figures released this week are likely to show official unemployment has fallen to a new low, but that wage rises are still significantly trailing inflation, economists believe.

The Reserve Bank forecast in May that Stats NZ would report on Wednesday that official unemployment edged down to 3.1% in the three months to the end of June, from 3.2% the previous quarter.

Some bank analysts believe that if the rate comes in significantly lower, that could tip the central bank into raising the official cash rate (OCR) by 75 basis points to 3.25% in August, though all believe a 50bp rise in the OCR to 3% remains more likely.

The official unemployment number is based on a survey by Stats NZ of those seeking work.

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Westpac said only about a third of people on JobSeeker benefits were counted as unemployed, and that only about a third of those counted as unemployed received the JobSeeker benefit, describing the overlaps as surprisingly small.

ANZ said there was a quite a lot of uncertainty about where the official unemployment rate would land, though it was most likely to come in somewhere between 2.6% and 3.5%.

Its central forecast is for official unemployment to drop to 2.8%.

A low number could put a 75bp rate hike “on the table” as the Reserve Bank prepares to release its next monetary policy statement on August 17, ANZ said in a research note.

But there was no sign that the Reserve Bank’s recent policy of raising the OCR by 50bp increments was not working to cool demand in the economy, so that was more likely, it said.

Bank economists are now questioning whether unemployment will rise much if at all this year.

Both globally and within New Zealand, debate is growing over whether central banks should hose down inflation as quickly as possible, or take more time in order to stave off the growing risk of recessions.

The Reserve Bank kept its blinkers firmly on inflation when it raised the OCR to 2.5% earlier this month.

But United States Federal Reserve chairperson Jerome Powell appeared to signal a shift to a more adaptable strategy in the US on Thursday, sending US share market prices higher.

ANZ forecast Stats NZ’s figures would show hourly profits in the private sector rose 5.8% from the June quarter last year, which would still be significantly below the annual inflation rate of 7.3%.

Company tax receipts show profits have been rising faster than wages during the pandemic.

“Whichever way the numbers land, we think the details of next week’s data are likely to confirm what many Kiwi businesses already know; the labour market is incredibly tight and workers are becoming an increasingly scarce resource,” ANZ said.

ASB senior economist Mark Smith said the data was likely to show the labour market “as tight as a drum”, forecasting unemployment would fall to 3%.

He was also not ruling out a 75bp rate-hike this month, despite describing a 50bp rise as more likely.

Smith forecast the labour market would remain tight until at least the end of this year.

“Wage growth is expected to accelerate to its highest annual rate since 2008 and become increasingly broad-based over the second half of 2022 as a wage-price spiral unfolds.”

Bank of New Zealand is questioning the Reserve Bank’s current forecast that unemployment would rise towards the end of the year, suggesting the June-quarter figure might not mark the low point.

It expected the labour market would “stay tight for a while longer, if not get even tighter near term”.

“This will keep stoking wage inflation and feeds our view of problematic core inflation,” BNZ said.

Westpac acting chief economist Michael Gordon was expecting official unemployment would come in at 3.1%, as the Reserve Bank forecast.

One interesting aspect to watch for would be the number of hours worked during the quarter, Gordon said.

“First official restrictions, then staff absences during the Omicron wave meant that average hours per worker were about 2% lower than normal in both the December and March quarters,” he said.

“That measure should improve in the June quarter, to the extent that worker absences was less severe in the last few months, though still very much an issue.”