FYI | Nov 09 2006
By Chris Shaw
After hitting a historical low of 3.6% in the June quarter there has been a softening in the New Zealand labour market, as the September quarter figure shows unemployment moved up slightly to 3.8% and employment fell 0.4%.
As Macquarie economist Daniel McCormack notes, this reverses the recent trend of weakening economic data but ongoing strength in labour market data, so bringing the two more into line.
McCormack suggests this is an indication employers are finally responding to the weaker economic conditions by reducing staffing levels, which implies a lack of confidence in the economic outlook given the costs involved in doing so.
This in turn implies further downside to the economic growth outlook in his view, as by putting off staff firms are cutting their capacity and confirming their expectations of ongoing weakness in demand.
In his view this reduces the pressure on the Reserve Bank of New Zealand (RBNZ) to raise rates, a view shared by Stephen Koukoulas of TD Securities. Koukoulas argues the latest data gives the bank more scope to hold rates steady while it monitors the health of the economy, though he sees no change to the tightening bias currently in place.
He expects this bias will remain as long as unemployment remains below 4%, as this implies no change to the current shortage of skilled labour and with labour market capacity utilisation levels still high there needs to be an easing for the RBNZ to become more comfortable with the inflation outlook.
The two don’t agree on what this means for the New Zealand dollar though, as McCormack expects the latest data to prove bearish for the currency as it suggests a weaker economy.
Koukoulas on the other hand takes the view while a further increase in rates is unlikely any cut is equally unlikely in coming months, so the dollar should continue to find support. He expects it to trade towards US$0.68 in coming months, compared to around US66.6c now.