Wage inflation abated as economy shrank

Monday 2nd February 2009

New Zealand wages growth slowed in the fourth quarter, as a contracting economy reduced demand for workers, giving the central bank more room to extend its interest rate cuts this year.

Wages for non-government workers rose a lower-than-expected 0.7% in the fourth quarter, excluding overtime, slowing from the third-quarter pace of 1.1%, according to Statistics New Zealand. The labour cost index (LCI) is likely to reassure the central bank that inflation pressures are dissipating in the domestic economy.

"The LCI was data was sufficiently compelling to conclude that wage inflation has finally passed its peak in this cycle," said Robin Clements, chief economist at UBS New Zealand. "The prospects are that wage inflation will continue to move lower over the coming year" calming any RBNZ concerns about inflationary pressures in the labour market, he said.

Fourth-quarter wages for non-government workers, including overtime, rose 0.7% percent from the previous three months to be 3.2% up on the year. Non-government wages rose 3.2% from a year earlier, according to today's report.

The report comes before government data this week which is expected to show the jobless rate rose to 4.7% in fourth quarter from a five-year high 4.2% in the third quarter.

Rising unemployment is set to become one of the biggest issues for economies worldwide this year as Japan, the US and Europe move into synchronized recession. More than 70,000 jobs were shed on a single day last week and figures in the US are expected to show the unemployment rate in America reached a 16-year high 7.5% last month.

"Unemployment hasn't really shown up yet, and when it does, it will grab everyone's attention," said Imre Speizer, currency strategist at Westpac Banking Corp.

Reserve Bank Governor Alan Bollard cut the official cash rate 1.5 percentage points to 3.5% last week and flagged the prospect of further, smaller reductions in borrowing costs as the global economic slump weighs on the domestic economy and inflation pressures ease. He said growth in the economy may not revive until the second half of 2009.

By Jonathan Underhill

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