Stalled jobs growth surprises investors, adds to RBNZ case for keeping rates low
An unexpected dip in employment in the June quarter surprised market analysts who were picking growth to remain robust, prompting a sell-off in the kiwi dollar and firming up expectations for the Reserve Bank to keep interest rates on hold for longer.
New Zealand's two-year swap rate dropped 5 basis points to 2.17 percent and the local currency fell to 74.27 US cents as at 11.50am from 74.67 cents immediately before Statistics New Zealand released figures showing employment shrank 0.2 percent in the three months ended June 30. Economists polled by Reuters had been expecting growth of 0.7 percent, extending the run of gains into a seventh quarter. The participation rate dropped to 70 percent from 70.6 percent and missed forecasts for a rate of 70.7 percent.
Investors latched on to the negative figures in the data dump, which also showed the unemployment rate of 4.8 percent, the lowest since December 2008, and an increase in hours worked.
"It was slightly on the weak side, despite the lower unemployment rate - the weaker employment figures stood out," said Jeremy Couchman, senior economist at Kiwibank in Wellington. "The market, and we did too, expected a reasonable increase in the quarter in line with employment indications data."
Firms surveyed in the ANZ Business Outlook last month signalled their intentions to take on more staff, shedding the usual winter chill on optimism about the general economy and their own activity.
Couchman said today's data will give the Reserve Bank greater confidence to keep the official cash rate at 1.75 percent, a level it's projecting to stay at until 2019. The central bank's next policy review announcement is on Aug. 10.
ASB Bank chief economist Nick Tuffley also took the view that the latest employment figures would embolden the Reserve Bank to stay on its course, and his team pushed out its projected timing for the RBNZ's first rate hike until February 2019 from a previous forecast of November 2018.
"The softness in employment growth is surprising, especially given employment indicators were robust over the quarter," Tuffley said in a note. "This release reinforces the idea that the RBNZ will be in no rush to raise interest rates anytime soon."
Still, Kiwibank's Couchman said the labour market was still "relatively solid" with employment growth averaging an annual 3 percent pace, and he anticipates it will eventually feed into higher wages at some point, despite the current lag.
Today's figures showed private sector wage inflation rose 0.4 percent in the quarter for a 1.6 percent annual increase, meeting economists' expectations.