UPDATE: 'Slack' NZ labour market keeps door open for more rate cuts

Wednesday 5th August 2015

New Zealand's slackening labour market gives the Reserve Bank more reason to cut interest rates as wage hikes remain muted and jobs growth lags behind an expanding working population for the first time since September 2012.

Traders are pricing in a 78 percent chance governor Graeme Wheeler will lower the official cash rate to 2.75 percent at the Sept. 10 meeting, helping prop up an economy that's weathering a slump in global dairy prices, nearing the peak of reconstruction work in Canterbury and has little inflation.

Statistics New Zealand figures today aren't expected to steer Wheeler away from that course, with the unemployment rate increasing to 5.9 percent, while a 0.3 percent quarterly increase in employment lagged behind the 0.7 percent expansion of the working age population, and missed economists' expectations. The participation rate fell 0.2 of a percentage point to 69.3 percent.

Meantime, the labour cost index, showed private sector ordinary time wage rates rose 0.5 percent in the quarter, accelerating from a 0.3 percent pace in March. Annual private sector labour costs rose 1.8 percent, in line with economists' expectations.

"In order to achieve its inflation goal, we think the RBNZ needs to ease policy further, and continue to expect the OCR to be cut to 2.5 percent by October this year," ASB Bank senior economist Chris Tennent-Brown said in a note. "The slack in the labour market and weak wage growth in today’s data reinforces this view."

The kiwi dollar fell immediately after the release, and has since clawed back that decline, trading at 65.40 US cents from 65.41 cents before the release.

Darren Gibbs, chief economist at Deutsche Bank New Zealand, said he isn't convinced the Reserve Bank's recent cuts are enough to return the economy to above-trend growth, and expects at least a further 50 basis points of reductions to push down the kiwi dollar.

"A policy easing at the next OCR review on 10 September seems extraordinarily likely in our view," Gibbs said.

Earlier this year, the Reserve Bank said it was monitoring wage and price-setting outcomes after consumer price inflation fell short of its expectations. The country's benign inflation environment and deteriorating terms of trade spurred governor Graeme Wheeler to start lowering interest rates in June, and last week he said the country's strong migration and labour force participation were among factors supporting the economy.

Today's data showed about 16 percent of private sector wages rose in the quarter, up from 11 percent in the March period, with about 55 percent of salaries up from a year earlier, compared to 55 percent three months earlier.

The quarterly employment survey showed ordinary private sector wages rose 1.2 percent in the quarter to $27.14, for an annual gain of 3.2 percent. Including the public sector, ordinary time wages rose 0.8 percent to $29.01 for a 2.8 percent annual increase.

ASB's Tennent-Brown said the labour market is "far from gloomy" with more people employed than ever before.

"And if we are wrong about the underlying strength in the labour market (and future employment growth and wage inflation weakens), the risk is the RBNZ needs to ease beyond our 2.5 percent OCR forecast," he said.

The household labour force survey showed manufacturing was the biggest contributor to jobs growth in the year, rising to 266,300 people employed from 241,700 June 2014, and outpacing expansion in the construction sector, where 221,400 people were employed, up from 198,700. That's the first time construction hasn't driven annual jobs growth since December 2013.

Total hours worked fell a seasonally adjusted 0.4 percent to almost 78 million hours a week, and were up 1.1 percent on the year, the smallest annual increase since December 2012.

Full-time employment rose 0.4 percent in the quarter for a 2.9 percent annual increase, while part-time jobs gained a quarterly 0.8 percent, and were 3.3 percent up on the year. Of those part-time workers, 17.8 percent were underemployed, indicating they want and are available to work more hours.

BusinessDesk.co.nz

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