Hive News Thursday: English sceptical on DTIs; Wage inflation stubbornly dormant; Inflation expectations edge up

Murray McCully. Copyright Lynn Grieveson / Hive News

Much of Parliament and the Beehive were focused yesterday on the Auditor General's report on Murray McCully and the Saudi Sheep deal. It found no evidence of corruption, but criticised the "significant shortcomings" in the deal and a lack of transparency, which it said the public was right to be concerned about and had yet to be resolved.

The Government brazened it out yesterday, with John Key defending McCully outside the Parliament and McCully defending his actions during an urgent Parliamentary debate on the issue. David Parker said in Parliament the report was an indictment of the Government's immorality and its lies to the public and Parliament. The Greens called on Key to ask McCully to resign.

I have not focused on the detail of the issue through various twists and turns over the last two years, but Tim Watkin's assessment this morning is pithy and thoughtful. He rightly argues: "The Buck stops nowhere."

Where's the wage inflation?

Elsewhere, the focus was on the jobs and wages figures for the September quarter. There is a lot more detail in the Hive News alert below, but the overall message is the economy is generating jobs at a much faster rate than expected, but it's not generating the wage inflation that would worry the Reserve Bank and it's also not reducing unemployment much, particularly among the young.

The circle is being squared through a higher participation rate, particularly among those over 65, and through net migration. I've written a weekend column of how all this economic and employment growth is not necessarily increasing wages much or per capital GDP per hour worked.

Here's the conundrum: employment has grown 179,000 or 7.7% over the last two years, but unemployment is only down from 5.2% to 4.9%. The number of unemployed actually rose by 1,000 to 128,000 over that two year period and the number of 15-24 year olds who were Not in Employment, Education or Training (NEET) rose by 3,000 to 74,000. The NEET rate is actually unchanged at 11.1% over the last two years.

The under-utilisation rate, which includes those people in part time jobs who want more work, fell in the September quarter to 12.2% from 12.7% in the June quarter, but is unchanged from two years ago. The number of under-utilised people has risen by 18,400 to 329,000 over that period. Meanwhile over that time there was net migration of 131,188 and an increase of 28,200 in the number of people over the age of 65 who are working.

A close look at both versions of the wages figures (Quarterly Employment Survey and the Labour Cost Index) show wage inflation still flat on its back despite regular predictions the wage inflation would come.

Average ordinary time hourly earnings, which are the base for indexing New Zealand Superannuation and are often used by the Government when referring to wage growth, rose 0.5% in the September quarter from the June quarter and were up 1.7% from a year ago, which was the lowest in more than five years and down from 2.3% two years ago.

Private sector wage growth, as measured by the Labour Cost Index (which adjusts for promotions and skill levels), was unchanged at 0.4% for the quarter and 1.6% from a year ago. That is also down from 1.7% two years ago.

Citing that weak wage growth, economists concluded that the Reserve Bank will go ahead next Thursday with the 25 basis point cut in the Official Cash Rate to 1.75% it has flagged twice in recent months, but most are now saying another cut to 1.5% is now off the agenda.

Inflation expectations up a tick

One of the Reserve Bank's scenarios in its last Monetary Policy Statement was for a drop in inflation expectations that forces it to drop the Official Cash Rate to 1.0% or even lower.

So yesterday's release of its Survey of Expectations (M 14) should have provided some reassurance, although it's not out of the woods yet.

The survey conducted by Nielsen for the Reserve Bank found one year ahead expectations rose to 1.29% from 1.26%, while two year ahead expectations rose to 1.68% from 1.65%. The Reserve Bank warned in its August MPS it was watching how long and short term inflation expectations change. Its surprise March cut in the OCR followed a drop in the one year measure from 1.51% to 1.09% and a drop in the two year measure from 1.85% to 1.63%.

The stabilisation since then makes that August scenario less likely.

But it's worth looking too at the deflationary effects of a high currency, which has remained strong and rose again over the last day after the jobs growth, the inflation expectations figures and more signs overnight that the Federal Reserve will hike again in December.

The Trade Weighted Index rose overnight to 78.3, which well above the 76.0 level in the Reserve Bank's August MPS scenario that would see the OCR cut by 20-30 basis points more than its central track.

Despite the rapid jobs and GDP growth, there are still deflationary headwinds pushing interest rates down.

English sceptical on DTIs

Elsewhere, I asked Bill English about the progress with the Reserve Bank's proposal to include a limit on Debt to Income (DTIs) multiples in its Macro-Prudential tool kit for dealing with the financial stability risks created by an over-valued housing market.

Last month the Reserve Bank formally asked English to add the DTI tool to its kit, but English's office said he had asked the bank for more information.

English was less than enthusiastic in his first public comments since that confirmation of a formal request. It was also his first comments since QV figures showed earlier this week that Auckland's house price inflation had eased in the last three months since the Reserve Bank applied its third round of Loan to Value Ratio (LVR) restrictions, including a nationwide 40% deposit requirement for landlords.

"There's just ongoing discussion. The Reserve Bank has a number of tools already available to it," English said.

"You need a pretty strong case to put further tools in the tool kit. There's a discussion going on about what debt to income ratios would add or not add to the current tool kit," he said.

English was particularly focused on unintended consequences.

"All these tools have indirect and unexpected effects as well as some direct effects, and you have to make sure you understand all those, particularly when the Reserve Bank has already got a number of levers that it could pull," he said.

"For instance, the impact on first home buyers, the impact of businesses that borrow against their households to source some of their debt and working capital. You've got to understand what you're doing."

Earlier this week Key appeared mores open to the idea of a DTI, but cautioned that the negotiations were being handled by English.

"Ultimately, New Zealanders have been saying they they recognise there's been pressure in the housing markets. They've been expecting the Government to respond and the agencies of the Government to respond and they can see that we're doing that," he said on Monday in his post-cabinet news conference.

"They're realistic enough to accept that these things take time. Ultimately, I think it's a good thing that the Reserve Bank has more tools in the toolbox and if you look at the most recent results it looks like the LVRs are having some impact and certainly some impact in the investor category. Whether that carries on and whether this is a short term blip, I don't know, we'll have to get better data on that."

However, yesterday afternoon he was more confident the Government had the housing market under control, saying the situation in Auckland was now stabilising.

"We can see that the elements of the plan are not only actually working in Auckland but, I think, starting to work around New Zealand, and I am confident that the housing markets will stabilise over time and more supply will be there," he said in answer to a Parliamentary question from Andrew Little about home ownership rates and housing unaffordability in the Mt Roskill electorate.

Tweets of the day:

Tim Hunter:

AG: "it was decided to use a contract with a private individual’s business interests to resolve a diplomatic issue". Why isn't that bribery?

Matthew Hooton:

So 3rd term @johnkeypm is now protecting a minister who has lied to him, the Cabinet, @NZParliament, the media and the public.

Bloomberg Markets promoting an article about New Zealand:

Scared? Anxious? Mega rich? There's a place you can go that's not on the nuclear target list...

Have a great day and look out for more below on the jobs figures.



3 November 2016

Hive News Alert: Jobs growth faster than expected, but wage inflation still subdued and jobless falls small

Hive News Alert: Jobs growth faster than expected, but wage inflation still subdued and jobless falls small

September quarter labour market figures were published today by Statistics NZ.

They show the economy generating strong jobs growth, but without much wage inflation or much of a reduction in employment because the extra jobs are being soaked up by record high net migration and an increasing number of superannuitants choosing to keep working.

To illustrate the conundrum: 179,000 jobs have been created in the last two years, but unemployment has actually risen by 1,000 over the same period to 128,000. That's because the Labour force rose by 180,000 over the same period, due largely to net migration of 131,188 over that period and an increase in the participation rate from 68.6% to 70.1%. That higher participation has been driven largely by an increase in the number of over 65s working. The number of over 65s working increased by 20,400 to 156,900 in the last year.

Statistics NZ reported employment rose 35,000 in the September quarter, with most of the jobs in Auckland and mostly in real estate and rental sectors. However, record-high net migration and that rise in the participation rate to a record-high soaked up those jobs and meant the unemployment rate fell only slightly, and wage growth was subdued.

The 1.4% jobs growth was stronger than the consensus forecast by economists of around 0.5%, but private sector wage and salary growth of 0.4% for the quarter was unchanged and broadly in line with forecasts. Economists said they continued to expect the Reserve Bank to cut the Official Cash Rate by another 25 basis points to 1.75% next Thursday, pointing to the still-subdued wage growth and doubts about the heavily revised Household Labour Force Survey.

The New Zealand dollar initially jumped around 30-40 basis points to 72.1 USc after the figures, but did not follow through on what would normally be seen as very strong figures, given the doubts about the survey and the modest wage growth. Wholesale interest rates rose 2 basis points.
Over 65s workforce growing strongly

The strong jobs growth is being soaked up by an increase in the labour force from both net migration and a rise in participation in the workforce, particularly through a rise in the number of workers over the age of 65.

The universally available and non-means tested New Zealand Superannuation system allows people on the benefit to work at the same time. The number of over 65s working rose 3,900 to 156,00 in the September quarter from the June quarter and was up by 20,400 from a year ago. The participation rate for over 65s rose to a record high 23.7% from 21.6% a year ago.

The overall participation rate rose to 70.1% in the September quarter from 69.7% in the June quarter and 68.4% a year ago. The working age population grew by 24,000 during the quarter to 3.739 million, due mostly to migration, while the number of people not in the labour force fell 8,000 to 1.117 million.

This meant the size of the labour force rose 33,000 and unemployment fell by just 3,000 to 128,000. The unemployment rate fell to 4.9% from a revised 5.0% in the June quarter. This was the lowest unemployment rate since the December quarter of 2008. Unemployment has fallen by 7,000 over the last year and is up 1,000 from two years ago.

All this meant wage inflation remained subdued, despite some predictions that wage inflation may show signs of stirring, given strong jobs growth and economic growth.

The Labour Cost Index's measure of salary and wage rates for the private sector rose 0.4% in the September quarter from the June quarter, which was unchanged from the previous five quarters. Annual private sector wage inflation was 1.6%, unchanged from the previous quarter.
Half of jobs growth in Auckland

Just over half (51.6%) of the jobs growth was in Auckland, following by Otago with 20% and Northland with 17.8%.

Statistics New Zealand said the only industry to have significant employment growth in the September quarter was the rental, hiring, construction, and real estate services sectors.

Construction jobs rose by 8,400, retail and food services rose by 5,500 jobs and rental, hiring and real estate jobs rose by 5,100.

ASB Chief Economist Nick Tuffley said the headline jobs growth figures appeared to be very strong, but changes in Statistics New Zealand's Household Labour Force Survey meant the figures should be treated with caution. He said he still saw another cut next week, with the chance of another one early next year.

"There are no indications in the labour market results that reinforce the need for further OCR cuts beyond next week, though the RBNZ will downplay the apparent strength of the employment/unemployment figures given ongoing question marks about their reliability," Tuffley said.

Westpac Senior Economist Anne Boniface said the labour market had clearly continued to strengthen heading into the second half of the year, but this was not yet having an impact on nominal wages.

Boniface said the jobs growth figures were likely to be stronger than the Reserve Bank expected.

"Coming in conjunction with this morning’s stonking rise in dairy prices, this means the economy is probably on a firmer footing than the Bank anticipated at its last Momentary Policy Statement. However, there will be lingering concerns about the lack of wage growth and the impact of this on the inflation outlook," she said.

Kiwibank Chief Economist Zoe Wallis also described the jobs growth as remarkably strong, but pointed to the lack of a pick up in wage inflation.

"From an inflation point of view, what remains missing in this story of a tightening labour market is a notable pick up in wage growth. The rapid rise in the labour force participation rate - influenced by current record net migration - suggest that rising labour supply is keeping downward pressure on wage growth," Wallis said.

Have a great day.