The unemployment rate has plummeted to 4 per cent, putting more pressure on the Reserve Bank to raise interest rates in a fortnight’s time.
Statistics NZ said the number of people who were unemployed in the three months to the end of June fell by 17,000, or 12.4 per cent over the quarter, which was a record drop in percentage terms since it began its survey in 1986.
Bank economists had been expecting a significant but smaller drop in the unemployment rate, from 4.7 per cent in the March quarter to 4.4 per cent.
ANZ and BNZ are now forecasting the official cash rate will rise to 1 per cent by the end of the year, with BNZ research head Stephen Toplis describing the unemployment data as a stonker.
Toplis said he could not rule out the Reserve Bank raising the rate by 0.5 per cent to 0.75 per cent in two weeks time.
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Kiwibank chief economist Jarrod Kerr believed the unemployment number all but confirms a rate hike from the Reserve Bank in August, describing it as another upside surprise.
Statistics NZ senior manager Sean Broughton said the drop in unemployment was largely in line with other labour market indicators, including declining numbers of beneficiaries, rising job vacancies, and recent media reports of labour shortages and skills mismatches.
The number of people reporting they were underutilised, for example because they were working fewer hours than they wanted, also plummeted, falling by 48,000 people or 13.3 per cent over the quarter.
Broughton said that big drop showed that spare capacity in the labour market was dwindling and that could lead to upward pressure on wage rates.
Infometrics economists mull strong jobs data ahead of the unemployment release.
The employment rate, which measures the proportion of the working age population in work, rose by 0.5 percentage points to 67.6 per cent.
Annual wage inflation was now sitting at 2.1 per cent, Statistics NZ said, up from 1.6 per cent three months ago but still below both the 3.3 per cent inflation rate and Stats NZ’s calculation of how much household living costs have risen over the year, which is 2.5 per cent.
The employment data is the last major scheduled piece of economic news that the Reserve Bank is likely to receive before it decides whether to raise the official cash rate from 0.25 per cent at its August meeting.
Bank economists have been assuming the Reserve Bank will raise the official cash rate to 0.5 per cent at that meeting, since the shock jump in inflation to 3.3 per cent last month, and the employment data has hardened that view.
ASB economist Nick Tuffley said the labour market had definitely tightened up a lot faster than the market let alone the Reserve Bank had been expecting just a few months ago.
Finance Minister Grant Robertson drew attention to the fact unemployment was now significantly lower than in Australia.
We are starting to see that wage growth accelerate a lot more sharply, so it is just really reinforcing that we are likely to see the Reserve Bank want to get on the front foot and start lifting interest rates very soon, he said.
An August rate hike looks like a done deal off the back of this and the risk is that it is followed up by a couple more interest rate increases in quick succession, he said.
Reserve Bank governor Adrian Orr appeared indicate on Tuesday that he believed the assumption that it was a done deal at that stage might be premature.
Orr said merely that the Reserve Bank’s monetary policy committee would need to think about when and how we would return interest rates to more normal levels and that its next opportunity to do that would be when it released its next monetary policy statement on August 18.
National Party shadow treasurer Andrew Bayly said the jobs figures were welcome but the wages data showed people were getting poorer with each pay packet.
ANZ chief economist Sharon Zollner said on Tuesday that the Reserve Bank’s decision to consult on tightening loan-to-value restrictions on mortgage lending and to consult on imposing debt-to-income controls on home loans could take some pressure off for a rate rise.
But she emphasised after the release of the employment data that ANZ did think the Reserve Bank would still need to raise rates this month.
We had the gut feeling that this was going to continue the run of considerably stronger data than market expectations, so in that regard the surprise was not a surprise, she said.
Anecdotes suggested this might be about as tight as the labour market got, she said.
There are still people unemployed and that reflects that we do have a mismatch between what firms are looking for and maybe the location or the skills of the people who are looking for work.
But that is always going to be the case to some extent and we thought that those issues would keep the unemployment rate a lot higher but it hasn’t so that is great news.
ANZ chief economist Sharon Zollner has changed the banks forecast on the back of the employment data and is now expecting the official cash rate to reach 1 per cent by the end of the year.
The Reserve Bank would be well aware it might have to turn around and cut the rate again next year, Zollner said.
There are a lot of things that could go wrong, with the Covid Delta variant for example. That is a pretty clear and present danger; one that you cannot forecast or predict.
Jarden analyst John Carran, who had previously been somewhat sceptical the Reserve Bank would raise the official cash rate this month, said the employment data had altered his view and he now believed a hike was on the cards.
But he nevertheless believed expectations of interest rate rises could be getting a bit ahead of themselves given the uncertainties especially given Australian Reserve Bank governor Philip Lowe had continued to signal on Tuesday that it did not expect to lift rates until 2024.
There is no doubt that raising the official cash rate is the right thing to do but it is just about how far and fast they go, he said.
I think they will perhaps not slam the brakes on too quickly.
Finance Minister Grant Robertson noted the 4 per cent unemployment rate compared favourably with Australia, where the unemployment rate is 5.2 per cent, and the 5.9 per cent unemployment rate in the United States.
The ongoing impact of the pandemic is likely to see unemployment move around a bit. Nevertheless, New Zealand has performed favourably against the countries we measure ourselves against, he said.
Stats NZ said New Zealands unemployment rate was now the eighth lowest in the 38-member OECD (Organisation for Economic Co-operation and Development).
The New Zealand dollar was up a third of a US cent on the back of the employment data.
National Party shadow treasurer Andrew Bayly said the improving employment figures were welcome news but said the wages data showed Kiwis were getting poorer with each pay packet.
With the latest labour market statistics confirming wages have only increased 2.1 per cent compared with 3.3 per cent annual inflation, New Zealanders pay packets are being eaten up by the rising cost of living, he said.
Council of Trade Unions economist Craig Renney echoed that concern, saying only 27 per cent of workers had a pay rise that matched the rate of inflation.
Unemployment among people aged 20 to 24 years was 6.8 per cent more than double the rate of those aged 30 and over which showed there was some way to go before we have truly delivered maximum sustainable employment, he said.
The New Zealand dollar rose by about a third of a US cent to US70.50c in the wake of Stats NZs release.
Westpacs head of New Zealand market strategy, Imre Speizer, said that was a small reaction given the enormity of the jobs data surprise.
The interest markets though are more correctly pricing it, Speizer said
Short-term interest rates were up about 10 basis points, which was a pretty big rise but fair, he said.
A 10 basis points swap would normally have seen the kiwi go up about a full cent, so the currency reaction is a bit wanting, whereas the interest rate reaction seems about right, he said.
