Low wage growth amidst tight labour market
Labour market statistics for the June quarter will be released by Statistics NZ next week and are expected to show the job market continuing its good performance. But in spite of low unemployment and capacity pressures spreading more broadly across the labour market, rather than being concentrated in a few select industries (eg construction), there is little sign yet that wage growth has begun to pick up steam. Nevertheless, with inflation back up inside the Reserve Bank’s target band of 1-3%pa during the last three quarters and population growth likely to start tapering off, we expect to see a pick-up in wage growth over the next year.
Evidence of further labour market tightening in the QSBO
The NZIER’s June Quarterly Survey of Business Opinion showed capacity pressures in the labour market are persisting. Skilled labour was reported to be the hardest to find since 1995 and was cited by the highest proportion of firms in nine years as the biggest factor constraining growth.
These constraints were most acute for firms in the building sector, with various indicators pointing towards strong demand but not enough people to do the job. An increase in employment in the building sector was reported by the largest number of firms since 1984. However, record high confidence is waning, with a net 20% of building firms optimistic about the next three months (down from a net 37% in the September 2016 quarter).
Aside from the building sector, there was also evidence of labour capacity pressure in the services and manufacturing sectors.
Next week’s labour market data expected to reflect this story
We expect next week’s data will show a 0.9% lift in employment over the June quarter, reinforcing a strong 1.2% March quarter rise. However, the unemployment rate is expected to lift from 4.9% in the March quarter to 5.1% as the participation rate holds at historically high levels. The high participation rate reflects record net migration (which is largely made up of young workers), with bright employment prospects also enticing other people back into the labour force.
But real wage growth remains low as inflation picks up steam
Even with a tight labour market, wage growth to date has been subdued. Consumer price inflation of 2.2%pa in the March quarter was stronger than wage growth of 1.6%pa. The 0.5% drop in real wages was the first decline since September 2011!
We’re expecting the QES measure of average wage growth to hold at 1.5%pa in the June quarter – well below the 2.4%pa average increase in the two years to June 2016 or the 5.0%pa average lift in the two years to June 2009.
No rush to raise rates
As an indicator of domestic cost pressures, the lack of wage growth at this stage means there is no rush for the Reserve Bank to adjust the cash rate. But wage growth is very much a lagging indicator of economic activity. The Bank will be examining the broader picture when determining its future interest rate path.
Recent movements in inflation have been driven by swings in food and petrol prices, and the Reserve Bank will be looking for more consistent price increases before adjusting its outlook for growth and interest rates. The Bank also has a little extra breathing space for now given lower-than-expected headline inflation for the June quarter. And rising retail mortgage rates and continued softening in the housing market are helping alleviate any near-term pressure on the Bank to lift the official cash rate from 1.75%.