Weak labour data reinforces need for more OCR cuts

Although the unemployment rate only ticked up to 5.2% in the second quarter of the year from 5.1% in the first quarter, it would have been higher if not for the steeper than expected slide in the participation rate.

The better headline masks the weaker reality of the Kiwi jobs market and the details continue to reinforce the need for further monetary policy easing, say bank economists.

BNZ research head Stephen Toplis says the unequivocally weak data should put a seal on a RBNZ OCR cut this month and increase the odds of one more after that.

“A look under the data bonnet reveals a picture that is at least as soft as we had feared and one which is certainly weaker than the Reserve Bank had expected when it put together its May Monetary Policy Statement.

To put this in context, employment has now only increased once in the past six quarters. It is down 0.9% on year earlier levels and, cumulatively 1.2% from its peak,” he says. That’s a loss of 36,000 jobs.

From the central bank’s perspective, Toplis says the labour market depicts an economy crying out for more support.

“Sure, the lagged impact of past monetary easing is yet to be fully felt but, clearly, there is still more work to be done.

“Rates should be cut in both August and October.”

Kiwibank economists Mary Jo Vergara and Sabrina Delgado say the labour force participation rate at a four year low in itself is a sign of a weak market.

“People are leaving the labour market because it is simply not as attractive as it once was. In fact, the labour force shrank over the year. That doesn’t happen often,” they say.

The 0.4% decline is the deepest since March 2013. The June quarter this year had a 0.1% decline and the 0.1% gain in the March quarter was revised to flat. On an annual basis, employment growth is running at the weakest rates since the GFC.

Delving into the details of declining employment, Vergara and Delgado say it’s the full-time workforce that continues to shrink the fastest.

Over the past year, the number of people in full-time employment has fallen by 33,000 as the workforce has shrunk by 1.4%.

Meanwhile, growth in part time employment has also started to show some cracks – contracting by 1.5%. Still, over the year the part time workforce has managed to expand by nearly 1%.

The concentration of job losses continues to tilt towards a younger demographic. Of the 48,600 total jobs loses over the year, nearly 30% were among those aged 15–24.

The data reinforces the need for further monetary policy easing, Vergara and Delgado say.

“Downside risks to medium-term inflation are growing given the soft labour market and dimming global outlook.

“We expect the RBNZ to cut the cash rate by 25bps this month and it will need to go to 2.5% eventually.”