A Better Headline Masks Dicier Details. The Kiwi Labour Market Deteriorates Further
Todays data reinforces the need for further monetary policy easing. Downside risks to medium-term inflation are growing given the soft labour market and dimming global outlook.
The Kiwi unemployment rate rose to 5.2% from 5.1%. It would have been higher if not for the steeper-than-expected slide in the participation rate. People are leaving the labour market, and it's keeping a lid on the unemployment rate. That in itself is a sign of a weak labour market.
The moderation in wage inflation continued. Annual wage growth slowed to 2.3%, down from 2.5% – the weakest in four years. Weaker wage inflation is helping to drive further easing in domestic inflation. It's that famous Phillips curve.
Today's data reinforces the need for further monetary policy easing. Downside risks to medium-term inflation are growing given the soft labour market and dimming global outlook. We expect the RBNZ to cut the cash rate by 25bps at the August meeting. And they'll need to go to 2.5% eventually.
At first glance, today's employment report looked a bit better than expected, but it wasn't. The unemployment rate came in at 5.2%, slightly below our forecast of 5.3%. It's the big drop in labour force participation that's keeping a lid on the unemployment rate. From (a downwardly revised) 70.7% to 70.5%, the participation rate has dropped to a four-year low. That in itself is a sign of a weak labour market. People are leaving the labour market because it is simply not as attractive as it once was. In fact, the labour force shrank over the year. That doesn't happen often. The 0.4% decline is the deepest since March 2013. Labour demand is soft. The June quarter recorded a 0.1% decline in employment. And the 0.1% gain in the March quarter was revised to flat. On an annual basis, employment growth is running at the weakest rates since the GFC.
The underutilisation rate – a broader measure of untapped labour market capacity – rose to 12.8%, the highest since September 2020. There's clearly significant slack within the Kiwi labour market.
Hours worked fell 1% over the quarter, marking the sixth straight quarterly decline. That's a concern for how June quarter GDP might unfold. High frequency economic indicators have already been flagging a marked slowdown, potentially a contraction, in activity. This statistic adds to the list.
Declining hours is being met with easing wage pressures. More and more workers are receiving smaller and smaller pay rises. For example, the number of workers receiving a pay rise above 2% but below 3% has been steadily increasing for the last two years. And the wage bill (private sector Labour Cost Index) rose 2.3% over the year – the lowest in four years. That's quite the drop from the 4.5% peak. That's indicative of a weak economy.
Overall, today's report presents a weaker labour market than the RBNZ had expected back in May. The unemployment rate may have been in line with their forecast, but only because of a deeper slide in the participation rate. Labour demand is clearly weaker than the 0.2% gain the RBNZ had forecast in May. The door remains open for a 25bps rate cut later this month. And the cash rate will need to go to 2.5%, eventually.
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Press Release – BNZ Chiefly, unemployment would have lifted by more were it not for discouraged workers leaving the labour force. The labour force participation rate fell to a four-year low. Labour market imbalance widens Squeeze on real wage growth not (quite) done Adds to retail headwinds Or maybe consumers saw it coming? More help from interest rates required Wednesday's smaller-than-expected Q2 lift in the unemployment rate to 5.2% was, on the face of it, better news. But you didn't have to scratch too far below the surface to reach the opposite conclusion. Chiefly, unemployment would have lifted by more were it not for discouraged workers leaving the labour force. The labour force participation rate fell to a four-year low. Youth unemployment and that of our largest city both hit highs not seen for more than 10 years. That's even as Otago printed a jobless rate of 2.9% (all rates seasonally adjusted). 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The key takeaway is that prospects for a sustained labour market recovery still look like a story for next year not this. That's one of a few factors casting a pall over on the long-awaited lift in retail spending activity required to kick the broader recovery into gear. Worth highlighting in this regard is that wage growth is coming off the boil at a time short-term inflation is going in the other direction. It's eco-chat for the cost-of-living strains being widely felt. Most of the wage measures released in Q2 (and there are lots), showed the gap between wage growth and inflation being squeezed further. Two of the better wage growth measures we'll focus on here are, first, the Labour Cost Index (LCI), which is adjusted to reflect the cost of labour to complete a certain job to a consistent standard. It controls for the impact of the likes of promotions and productivity that are present in the second measure – the 'unadjusted' LCI. Basically, the first is a pure wage inflation measure, the second a closer approximation to the wage adjustments the average worker receives. The decline in June quarter LCI wage inflation, to 2.4%y/y, means it is now back below the 2.7% annual inflation reported for the same quarter. That ends five quarters' worth of modest inflation-adjusted wage gains. The 'unadjusted' LCI suggests growth in worker compensation is still running ahead of inflation. Although, perhaps tellingly, not so a simple measure of 'essentials' inflation. Our approximation of the latter is based on petrol, energy, food, and rates. Quarterly rates of change in prices and wages are one thing, but for the average consumer, the cumulative change over time probably matters more. The purchasing power lost in a bout of inflation can be felt long after said inflation has subsided. Looking at ratios of wages to prices gives a sense of how the relativities have travelled over the past few years. The chart below indexes wage/price ratios back to 2017 levels. The inflation-adjusted (i.e. 'real') LCI wage index remains below where it was prior to the inflation spike of 2021/22. As noted earlier, this measure is more reflective of wage growth for a standardised job than that of an individual. The real 'unadjusted' LCI index – a measure more closely aligned to growth in labour earnings – has only just clawed its way back to where it was five years ago. The flattish picture for aggregate real wage growth of course just formalises what's been clear for consumers in the supermarket aisles or paying the bills for some time. There will also be a lot of demographic variation around these numbers. Such are the masking effects of top-line macro statistics. Wages are not the only way households can earn income or accumulate wealth. But when we pull in some of the broader trackers of such the above 'flat' conclusion remains. Stats NZ's comprehensive but admittedly dated household disposable income figures show inflation-adjusted growth in all household income sources dipped back into the negative in March. We'd be surprised if the June quarter was any different. Meanwhile, household net wealth has flat-lined since late 2021 as the uplift from financial assets has been offset by non-financial (read: housing) assets. Pulling all the threads together, it's not hard to see why household spending remains under strain. But what of the outlook? In the short-term, it's difficult to foresee much in the way of relief. Our forecasts are for wage growth to ease a little further, and for CPI inflation to rise to a peak of 3.0% in the third quarter. Combined, that's clearly directionally unhelpful for inflation-adjusted incomes. It's another headwind in behind the many others bearing down on retail spending. The 'good' news, perhaps, is that consumer confidence is already so supressed that additional compression in real wage growth may not impose any additional weight on spending appetites. That is, maybe consumers saw it coming? There's a hint of this in the loose correlations in the chart below. From the final quarter of this year some improvement in real wages is anticipated as the short-term spike up in inflation starts to unwind. The long-await cash release from the current period of mortgage re-fixing will also be providing some assistance. But we're still left nursing continued downside risk on the lift in household spending that we (and others like the Reserve Bank) are forecasting for the coming 12 months (forecast tables at back). Certainly, consumer confidence needs to lift a long way from here for these forecasts to have any hope of panning out. The analysis above suggests that might take some time. It's increasingly clear that the wobbling economic upturn needs a little more help from interest rates. We thus maintain our view that the Official Cash Rate will head sub-3% this year with 25bps cuts seen in both August and October. Markets are increasingly coming around to this view boosting the odds we see additional falls in short-term retail interest rates.
