More banks trim OCR forecast after unemployment inches up to 3.4%

Wednesday, 1 February 2023

Unemployment moved in the opposite direction to the Reserve Bank’s forecast.

Official unemployment rose to 3.4% in the December quarter and pay did not appear to rise by quite as much as some economists had been expecting.

The slightly weaker-than-expected figures prompted ASB and BNZ to join ANZ, Westpac and Kiwibank in downgrading their expectations of the change the Reserve Bank would make to the official cash rate on February 22, with all the banks now forecasting a 50bp rise in the OCR, rather than a 75bp hike.

BNZ research head Stephen Toplis said it now also expected the OCR, which is currently 4.25%, to peak at 5% this year rather than at 5.5%.

The rise in unemployment, from 3.3% in the September quarter, was small but in the opposite direction to what many banks and the Reserve Bank had been expecting and comes amid forecasts of a recession this year.

Minister of Social Development Carmel Sepuloni says the Ministry of Social Development needs to prepare for an anticipated rise in unemployment (video first published in October).

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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.

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The Reserve Bank, ANZ and ASB had been tipping official unemployment would fall to 3.2%.

The central bank was last week also shown to have been overestimating likely inflation, when December quarter inflation came in steady at 7.2%, shy of the 7.5% forecast it made in November.

Stats NZ reported the labour underutilisation rate, which is a broader measure of underemployment in the economy, rose to 9.4%, from 9% the previous quarter.

However, it noted that was mainly because of an increase in the proportion of people who said they were available for work, rather than an actual change in the proportion of people in employment or wanting to work more hours.

The proportion of New Zealanders in employment remained at 69.3%, which was the highest recorded since it started measuring that in 1986, it also noted.

But ANZ said cracks were beginning to show in the labour market.

Average ordinary time hourly earnings rose by 7.2% over the year to mid-October, based on data from its Quarterly Employment Survey, which was down from a 7.4% annual rise the previous quarter.

Work and wellbeing statistics manager Becky Collett noted that was still the second-highest jump since Stats NZ began the survey in 1986.

However, the decline could mitigate against a larger-than-expected increase in the OCR.

Average ordinary time hourly earnings in the private sector rose 8.1% to $36.43, significantly short of ANZ and the Reserve Bank’s forecast of a 9.1% jump.

Kiwibank senior economist Jeremy Couchman said that, overall, wage growth was “a bit weaker than expected”.

But he said there was still a chance it could peak higher in the current quarter given the time lag that often exists between inflation and pay.

Despite the small drop in official unemployment, the labour market was still relatively tight, he said.

The Labour Cost Index, which is an attempt by Stats NZ to measure the quality-adjusted cost of labour but which has been treated with a pinch of salt by ANZ, rose 4.1%, up from an annual increase of 3.7% the previous quarter.