“Until then we should expect to see the unemployment rate continue to push higher.”
It was on track to peak above 5.5% by mid-2025.
Labour cost growth was expected to cool as the balance of power increasingly tilted towards employers, and as living cost increases slowed, he said.
“The Labour Cost Index (LCI, private sector ordinary time) should increase by 0.8%, with annual labour cost growth cooling to 3.5%, the lowest since mid-2022.”
“Further cooling in labour cost growth is the pre-requisite to annual core inflation moving below 3% on a sustained basis.”
“The labour market is clearly softening, with higher-frequency indicators pointing to outright job losses in recent months,” Westpac senior economist Michael Gordon said.
“However, the slowdown doesn’t appear to be outside the bounds of what the Reserve Bank was looking for.”
A range of indicators showed that the labour shortages that plagued employers in previous years were now a distant memory, he said.
“That’s due to a combination of a surge of migrant workers to fill the gaps once the border was reopened, and a drop in demand for new workers as the economy has cooled off.
“Job advertisements are now below pre-Covid levels, businesses report that labour is no longer hard to find, and our Employment Confidence Index shows that households are finding job opportunities much harder to come by.”
Despite that downturn, there was little likelihood that the data would be bad enough to justify market expectations for rate cuts in August, economists said.
“This is the last big piece of data ahead of the August MPS, where the market is currently pricing more than a 65% chance of a cut,” ANZ chief economist Sharon Zollner said.
“We certainly agree that the Q2 labour market data will be important for the RBNZ’s calibrations, but if the details are close to our (and the RBNZ’s) expectations, we don’t think it’s a smoking gun for the imminent rate cuts that the market is putting relatively high odds on.
“All that said, should recent weakness in the broad range of forward indicators persist over coming months, that, combined with confirmation from the Q2 labour market data that momentum is indeed softening, would see the odds of the cutting cycle kicking off as early as October increase.
“But for now, given what we’ve seen so far, we think November remains the likeliest timing for the beginning of the cutting cycle.”
Gordon agreed.
“We think that for the RBNZ to begin cutting rates in August, we’d need to see a significant upside surprise on the unemployment rate next week, perhaps close to 5% ,” he said.
“That would be a very large one-quarter increase – outside of the temporary Covid shock, we haven’t had one of that size since the 2008 Global Financial Crisis, and before that the severe recession in 1991.”
Similarly, the RBNZ would need to see evidence that wage inflation is dissipating more quickly than it expected, he said.
“While wages don’t play a big role in the RBNZ’s modelling, they are nevertheless a major source of the remaining ‘stickiness’ in non-tradeable inflation. Our wage growth forecast of 0.8% for the June quarter is only marginally softer than the 0.9% that the RBNZ was expecting.”
Liam Dann is Business Editor at Large for the New Zealand Herald. He is a senior writer and columnist, as well as presenting and producing videos and podcasts. He joined the Herald in 2003.
