Wage rises squeezed

Stats NZ figures on the second quarter’s labour market show cost growth was not as high as feared, but it is still high. Annual wage growth is around record highs and wage increases were widespread in the second quarter of this year.

Labour costs rose 1.1% quarter-on-quarter for the private sector LCI (excluding overtime), with annual LCI inflation still elevated at 4.3%. Labour costs in the public sector rose a more tepid 0.6% quarter-on-quarter (4.2% year-on-year) but look set to move higher still given well-publicised wage settlements that could lift wage demands for both public and private sector workers.

The labour data show 65% of jobs had annual wage increases, compared to 66% in the first quarter data. Of the jobs, 17% had increases between 3-5% whereas a record 40% had increases greater than 5% in the second quarter of this year.

Average hourly earnings from the Quarterly Employment Survey (QES) revealed a sizable rise, but  with the annual increase easing to 6.9%. Weekly earnings advanced at a solid 6.4% clip over the June 2023 year.

ASB chief economist Nick Tuffley says despite strong nominal wage growth, incomes are being squeezed by the elevated cost of living (7.2% for the June year). Hence the glum mood of consumers. Employment levels are high, but households are largely running to stand still.

He says the still high wage growth environment remains inconsistent with the RBNZ’s 1-3% inflation target.  “This will continue to worry the RBNZ and it is likely to remain wary and will want to maintain restrictive OCR settings to squeeze inflation out of the system.”

“A nervous wait lies ahead for the RBNZ and there is still some risk of the OCR peaking above 5.50% this cycle. The central bank is unlikely to entertain OCR cuts until it is confident 1-3% inflation is attainable. OCR cuts before mid-2024 look unlikely.”

Growth peaked

Meanwhile BNZ research head Stephen Topliss says wage growth has well and truly peaked.

He says despite the unemployment rate rising to 3.6% in the second quarter, the RBNZ looks at the underutilisation measure when assessing how far the economy is from maximum sustainable employment

“One could argue that the 0.2% rise in the employment rate to its record high might concern the RBNZ. It will certainly be noted but any consternation it generates will be moderated by the fact that the higher than expected employment growth – 1% for the quarter compared to the RBNZ’s 0.6% pick – was still insufficient to push wages higher or the unemployment rate lower.”

Instead, the strength in employment is further evidence that soaring labour supply, driven by migration, is taking pressure off the labour market, directly, and off generalised inflation, indirectly.

Topliss says the bank’s view is the labour market data is a headwind to those looking for a more hawkish central bank.

There are clearly significant two-sided risks around the future progression of the labour market:

• Everyone is assuming net migration is peaking? But is it?
• How much will recent state sector wage hikes put further upward pressure on total wages?
• Will the current demand for labour be sustained or will a shrinking New Zealand economy result in lay-offs in advance of current expectations?

As an interesting aside, New Zealand’s unemployment rate is now higher than Australia’s for the first time in 10 years. “Strength in the Australian market is becoming an increasing drag on New Zealand’s labour supply,” Topliss says.

Tune changed

Westpac has changed its tune on when the official cash rate will change.

It is now predicting the RBNZ will lift the OCR to 5.75% in November instead of this month.

In large part, chief economist Kelly Eckhold says part of the accumulated evidence supporting the bank’s view is the labour market has been a particular area of strength.

“Employment growth has remained strong in defiance of concerns of a recessionary economy.

“Large numbers of migrants have found jobs in a labour market that, while better balanced than a year ago, remains tight.”

He says the strong labour market has meant that household incomes have continued to rise strongly, leaning against the considerable disinflationary impact of the RBNZ’s 525 bps of interest rate increases delivered in recent years.

“The bottom line is the interest rate reductions we had previously expected to occur in the second half of next year will likely now occur more slowly, consistent with the RBNZ only easing cautiously as inflation moderates slowly. “

Eckhold suspects many other central banks will be taking a similar, cautious approach.