Unemployment rose 0.3ppts to 3.9% in the September quarter, in line with our expectations. Private sector wage growth remained high by historical norms, but shows clear signs of easing.
- Unemployment rate: 3.9% (prev: 3.6%, Westpac f/c: 3.9%, RBNZ f/c 3.8%)
- Employment change: -0.2% (prev: +1.0%, Westpac f/c: +0.4%, RBNZ f/c +0.3%)
- Labour costs (private sector): +0.9% (prev: 1.1%, Westpac f/c: 1.0%, RBNZ f/c 1.0% )
- Average hourly earnings (private sector, ordinary time): +2.0% (prev: 1.9%)
Employment fell 0.2% in the September quarter, causing annual growth to slow to 2.4 from 4.1% previously. This was a weaker outcome than suggested by the tax-based Monthly Employment Indicator (this rose 0.4% during the quarter). This might reflect genuine differences in coverage and definition between the two indicators – the MEI counts filled jobs rather than people employed and does not cover the self-employed. However, it is also possible that the unexpected weakness reflects variability in the survey sample (new respondents are rotated into the survey each quarter). On that note, also surprising was a 0.4ppts decline in the labour force participation rate to 74.0%. As a result of that decline, the estimated labour force barely grew in the September quarter despite continued strong migrant inflows and a 0.6% increase in the working age population.
But as is usually the case, differences in survey sample tend to wash out in the unemployment rate, which increased 0.3ppts to 3.9 in the September quarter – the highest reading since June quarter 2021 and an outcome that was in line with our expectations and those of the market. Also of note, a broader measure of unemployment known as the underutilisation rate – which amongst other things also captures those people that would like more work – increased by a 0.5ppts to 10.4%. So whether or not employment growth was really as soft as suggested by today’s report, it remains the case that there has been an unambiguous easing of conditions in the labour market – an outcome that was clearly foreshadowed by business survey indicators of skill shortages and labour constraints.
With the unemployment rate now well above the historic lows seen last year, wage growth is showing clear signs that it has peaked. The overall Labour Cost Index (LCI) rose 1.1% for the quarter, leaving the annual growth rate at 4.3%. However, as we expected, that result reflecting large settlements in parts of the public sector (such as healthcare), with the public sector LCI increasing 2.2% during the September quarter, lifting annual growth to 5.4%. We do not expect these settlements to continue in the future.
More importantly for the RBNZ, the LCI for the private sector increased just 0.9% in the September quarter, lowering annual growth by 0.2ppts to 4.1% (and a peak of 4.5% in the March quarter). This outcome was 0.1ppts weaker than we had expected. The unadjusted LCI – which better represents developments in take-home pay – increased 1.1%. This was the smallest increase since the December 2021 quarter, and lowered annual growth by 0.4ppts to 5.7% (thus tracking broadly in line with CPI inflation of 5.6%). Annual growth in private sector average hourly earnings, as measured by the more volatile Quarterly Employment Survey, dropped back to 7.1% from 7.7% previously.
Today’s news should leave the RBNZ comfortable with the labour market projections made in the August Monetary Policy Statement, and thus a hike in the OCR at the 29 November meeting remains very unlikely (as reflected in market pricing). Employment growth was weaker than the RBNZ had forecast – at least at face value – and the unemployment rate rose by slightly above the 3.8% figure that the RBNZ had forecast. In addition, growth in the private sector LCI was also 0.1ppts less than the RBNZ had forecast.
Looking ahead, the RBNZ is forecasting the unemployment rate to rise significantly further to 4.4% by the end of this year (data to be released in early February). Together with the outcome of the December quarter CPI (released mid-January), ongoing developments in the labour market will have a significant bearing on whether the RBNZ continues to take the view that its inflation projections remain broadly on track. More robust than expected inflation and/or labour market data would increase the likelihood that the RBNZ opts to lift the OCR at the February 2024 MPS meeting (as is Westpac’s forecast).
