Interest rates could rise higher and faster than anticipated after new data showed New Zealand hitting a record low unemployment rate.
Unemployment fell to 3.4 per cent in the September quarter and is now on par with the previous record low set in December 2007.
That’s well ahead of consensus forecasts of around 3.9 per cent.
It suggests there is a surge in wage inflation coming and the Reserve Bank may have to act faster to lift interest rates, economists say.
But while it all points to an economy running hot and myriad inflationary concerns, none of them are as bad as high unemployment and recession.
Low unemployment is still a good thing, especially for the younger generation.
More people have work, fewer people are classified as unemployed.
“It’s a good time to be a worker in New Zealand, and we expect the shift in the balance of power to be reflected in both higher wages and higher turnover,” said ANZ chief economist Sharon Zollner.
The Delta outbreak and subsequent lockdowns may make this data “noisy”, as economists like to say.
There may have been a lockdown impact on data collection – such as the inability to look for work and officially qualify as unemployed – exaggerating the topline figure.
But employment also rose by 54,000 in the quarter – an increase of 2 per cent (versus market expectations of 0.4 per cent).
The total number of people in work is now 115,000 above where it was in the December 2019 quarter before Covid.
The employment rate for women was 64.6 per cent, the highest rate ever recorded for women.
Wages rose. “Average ordinary time hourly earnings, increased 3.5 per cent over the year to reach $35.25,” StatsNZ said.
“Not a single headline metric hit a bum note,” said Kiwibank chief economist Jarrod Kerr.
“Employment surged, unemployment fell, underemployment dropped, participation rose, and the lion’s share of the gains came from female employees.”
Kerr described the result as “another massive upside surprise”.
The impact of lockdown was hard to discern, he said.
“Total hours worked in the third quarter fell 6.6 per cent. We expect to see short-lived and limited fallout from delta disruption in the current quarter.”
Meanwhile an extremely tight labour market could mean only one thing, he said.
“Wage growth is set to rise ahead. We’re picking wage growth will lift well above 3 per cent next year.”
The prospect of higher wage inflation, adding to already surging consumer prices points to a higher interest rate track in the year ahead.
“Today’s data raises the risk of a 50 basis point rate hike by the RBNZ in November,” said Sydney based Ben Udy at Capital Economics.
“[It] should encourage the RBNZ to hike rates more aggressively than we had previously anticipated in the months ahead.”
ANZ’s Zollner urged a note of caution, suggesting the RBNZ would need to wait and see if the extended lockdown bit harder in the fourth quarter.
ANZ is still forecasting the central bank to raise rates in 25 basis point increments to a peak of 2 per cent next year.
“But with inflation so high and the labour market so tight, it’s clear that those hikes are needed,” Zollner said. “All up, the RBNZ clearly has more work to do.”
Speaking at Reserve Bank’s financial stability briefing this morning, Governor Adrian Orr said the labour market data was “highly volatile” at present globally.
“But the underlying trends are very clear, the Covid-19 economic shock has had a significant impact on the supply side of the economy as well as the demand,” he said
“We are seeing strong demand for all resources but also at a time when the ability to meet that demand is challenged.”
Low unemployment rates combined with record low immigration have also made it difficult for businesses to fill available roles amid the pandemic.
Labour shortages could start to limit business growth, that could start to slow the economy and eventually lead to higher unemployment.
But, as today’s number shows, there is no sign of that yet.
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