Economic facts are changing to better meet the Reserve Bank’s rhetoric

Thursday, 8 February 2024

Unemployment is rising at a much slower pace than economists had forecast.

ANALYSIS: Often, all economic developments seem to point in one direction, such as for a few months last year when the country appeared to be heading towards “a soft-landing” of minimal growth and consistently falling inflation.

Other times, the winds seem to whistle up from nowhere and hit from all directions, making the direction of travel as hard to predict as the chop in Wellington harbour.

Word from Stats NZ that unemployment only inched up to 4% in the December quarter appears further confirmation that we have entered one of those “other times”.

We know from GDP figures released released by Stats NZ that economic activity has been declining.

But Alan McDonald, head of advocacy at the Employers and Manufacturers Association, says the unemployment figures released by Stats NZ on Wednesday “don’t feel right”.

He suggests they “may not be telling the full story of what is happening in the economy given the pressure many businesses find themselves facing”.

“We are increasingly hearing from our members that the economic environment is becoming more and more difficult,” he says.

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.

Yet it is also the case that business confidence as measured in surveys conducted by ANZ and the New Zealand Institute of Economic Research has been soaring.

The outlook for inflation is similarly nuanced.

Headline inflation has dropped as fast as expected to 4.7%.

But domestic inflationary pressures have recently been stronger than the Reserve Bank had expected and fears are rising of a supply-side shock from overseas.

The Organisation for Economic Cooperation and Development (OECD) noted on Monday that global shipping costs had more than doubled over the past few months as a result of the conflict in the seas off Yemen and the drought afflicting the Panama Canal.

If that carried on, it could raise the price of imports across developed economies by about 5%, the OECD cautioned.

Reserve Bank chief economist Paul Conway indicated in a speech last month that would not be the kind of development that the central bank would now choose to “look through” and ignore, as it might have in the past.

Late last year, the conventional wisdom was that the Reserve Bank was merely jaw-boning when it suggested another rise in interest rates could be on the cards, but the facts may be changing to better fit its hawkish rhetoric.

The medium-term forecast is still for higher unemployment, lower inflation and lower interest rates, but the route and time to get there is more uncertain.

Prior to Wednesday’s unemployment data, ANZ commented that it “wouldn’t put a 0% chance” on a hike in the official cash rate on February 28.

Now it says a hike has become become “a very real possibility”.

BNZ research head Stephen Toplis also says what it had estimated as a “non-zero chance” of a rate rise has now got a little bigger.

Westpac senior economist Michael Gordon says Wednesday’s labour market figures probably reinforce the Reserve Bank’s stance that interest rate cuts are much further away than financial markets have assumed.

ASB senior economist Mark Smith now envisages rate cuts could be “delayed” beyond its original forecast of August, to November.

The longer-term worry is that if economic activity has been falling despite more people than expected being in employment, that is more evidence we are becoming markedly less productive as a country.

Toplis notes the latest labour market statistics numbers point to “really weak” productivity.

And some point we are going to need to work out why.

In the meantime, as Toplis notes, its difficult to see the resilient employment data being downplayed by the Reserve Bank, given its “general sense of nervousness about the economy’s inflationary outlook”.