NZ: Labour Market on track for a raise - ANZ

According to Liz Kendall, Senior Economist at ANZ, New Zealand’s labour market data for Q1 2018 is expected to show continued strength in the labour market, with only gradual improvements likely from here.

Key Quotes

“The labour market has been strong of late, and we expect this to continue to be the broad theme. Employment growth has been quite volatile recently. In June 2016 there was a step-change increase in employment as a result of HLFS redevelopment. Since then, employment growth has been choppy. Looking through this, employment has been growing at about 1% q/q on average – a very strong rate.”

“Given recent strength, we expect employment growth is due for a weaker quarter. We are picking a 0.3% increase, which would see annual growth pull back to 3.0% y/y (from 3.7%). This is consistent with some softening in near-term indicators since mid-2017, including reported hiring in the QSBO, hiring intentions in the ANZ Business Outlook, and growth in ANZ Job Ads. Over the medium term, we expect employment growth will remain robust but slow gradually, with capacity constraints in the broader economy limiting future increases.”

“We expect the participation rate will be flat in the quarter at its current elevated level. But we expect the labour force will increase 0.5%, as a result of continued strong growth in the working-age population, which has increased 2.3% over the past year. We expect strong growth in labour supply will continue to be a feature of the labour market, with very strong migration inflows slowing only gradually.”

“We expect the unemployment rate to be broadly steady. The unemployment rate was 4.5% in Q4 – consistent with a ‘tight’ labour market and below our estimate of the NAIRU. We are expecting a modest tick up to 4.6% in Q1 2018, but this is in the context of trending gradually lower.”

“Wage inflation is expected to remain modest, but we are anticipating further increases in time. Although it is subdued, wage inflation has increased over the past year, from 1.5% y/y in Q1 2017 to 1.9% y/y in Q4. We expect LCI private sector wage inflation will be stable at 0.4% q/q, which would see annual wage inflation tick up further to 2.0%. We expect QES private sector hourly earnings to soften to 0.5% q/q (from 0.8% in Q4), but for annual growth to nonetheless increase to 3.5% (from 3.1%).”

“With the labour market tight and capacity pressures expected to continue to build, conditions are in place for wage inflation to increase further – the question is when.”

“The RBNZ will now be more focused on labour market data, given it is moving to a dual-style mandate. But we don’t think next week’s figures will change its thinking.”