The Global Strategy Team at TD Securities (TDS) has provided a brief preview of the upcoming release of the quarterly employment details from New Zealand, which is scheduled to take place during the Asian session on Wednesday.
TDS expects labor market tightness to show signs of easing in the first quarter, with the unemployment rate edging higher to 3.6% (RBNZ: 3.5%) from 3.4% in the previous quarter. The team anticipates some disruption to the jobs market in Q1, given the impact of Cyclone Gabrielle, and is predicting flat employment growth over the quarter. Nonetheless, a fall in the participation rate could help cap a rise in the unemployment rate. TDS expects private wages to rise at a still-firm pace of 1.0% q/q, bringing the annual increase in the Labour Cost Index (LCI) to 4.6% y/y, a new record. After its surprise 50bps hike, the RBNZ has demonstrated its resolve to tame inflation, and a softer labor market print may not be enough to dissuade them from hiking another 25bps in May.
The labor market in New Zealand has remained tight in recent years, with unemployment rates consistently hovering at or below 4%. This has been partly due to strong growth in the country’s population, fueled by immigration and an increase in the number of people of working age. In addition, the economy has been growing at a steady pace, creating more jobs and opportunities for New Zealanders. However, various factors are expected to contribute to a slight easing of labor market tightness in the coming quarter.
One significant factor that is expected to impact the labor market is the aftermath of Cyclone Gabrielle, which hit New Zealand in late January. The cyclone caused significant damage and disruption across the country, particularly in the agricultural and horticultural sectors, which are major employers in the country. As a result, it is likely that some jobs were temporarily lost or put on hold, contributing to a flattening of employment growth in Q1.
Another contributing factor is a potential decrease in the participation rate, which measures the share of the working-age population that is either employed or actively seeking work. A drop in participation can result from various factors, such as people retiring, returning to education, or simply becoming discouraged and giving up on finding work. If the participation rate does, in fact, decrease, it could help to limit any potential rise in the unemployment rate.
In spite of these factors, wage growth in New Zealand is expected to remain strong, with TDS predicting a 1.0% quarter-on-quarter increase in private wages. This would bring the annual increase in the LCI to a new record of 4.6%. This strong wage growth can be partly attributed to the tight labor market, as employers are forced to offer higher wages to attract and retain staff. In addition, recent increases in the minimum wage and a growing focus on pay equity have contributed to the upward pressure on wages.
The Reserve Bank of New Zealand (RBNZ) has been closely monitoring the labor market and inflation, and recently surprised markets with a 50 basis point hike in the official cash rate. This move was a clear demonstration of the central bank’s commitment to keeping inflation under control, even at the expense of potentially stifling economic growth. With this in mind, a softer labor market print in the upcoming quarter may not be enough to deter the RBNZ from raising rates by a further 25 basis points in May.
In conclusion, the New Zealand labor market is expected to show some signs of easing in the first quarter, due to factors such as the impact of Cyclone Gabrielle and a possible decline in the participation rate. Despite this, wage growth is expected to remain strong, reflecting the continued tightness of the labor market. Meanwhile, the RBNZ has demonstrated its commitment to controlling inflation, and it is unlikely that a single quarter of weaker labor market data will alter the central bank’s course.
