3 Aug 2016

Slow wage growth could spark more interest rate cuts

1:34 pm on 3 August 2016

Wage growth in New Zealand continues to be subdued, and may lead to further cuts in interest rates, say economists.

Money in pocket

Money in pocket Photo: 123RF

Official figures released by Statistics New Zealand today show the labour cost index - which reflects changes in pay rates to have the same job done to the same standard - rose just 0.4 percent in the three months to June.

Wage growth has eased to 1.5 percent over the past year, which is at the bottom end of the 1.5 percent to 1.8 percent experienced since the March 2013 quarter.

Private sector wage inflation fell slightly to 1.6 percent and 1.3 percent for the public sector.

Statistics NZ said households' purchasing power had improved due to even lower inflation of 0.4 percent in the June year, but the gap was closing.

"The gap between the labour cost index and inflation was 1.1 percentage points, the smallest gap since the end of 2014," Statistics NZ business prices manager Sarah Williams said.

The Quarterly Employment Survey (QES) - also released today - reported filled jobs rose at a faster annual pace of 3.1 percent, with more people working in accommodation and food services, construction, and health services.

"There were 14,000 more jobs in accommodation and food services, up a strong 11 percent in the June year," Ms Williams said.

But the data was softer than economists had expected.

Westpac senior economist Anne Boniface said quarterly employment growth of 0.3 percent, and hours paid growth of 0.2 percent, were weak.

"Looking ahead to the HLFS [Household Labour Force Survey] data, and its delayed release in a fortnight's time, the soft employment growth signalled by the QES survey is likely to lead to us taking another look at our forecasts for HLFS employment growth," Ms Boniface said.

ANZ senior economist Philip Borkin said there were question marks over the demand for workers in the construction sector, with quarterly wage growth easing from 2.2 percent to 2 percent year on year.

"This is completely at odds with anecdote, and leaves us scratching our heads."

ASB economist Jane Turner said a subdued labour market added to the case for lower interest rates.

"We're not seeing strong enough employment growth to offset the strong inflows from net migration, and as a result wage inflation remains quite subdued."

"This is painting an overall soft inflation picture for the Reserve Bank and they will need to cut the OCR [official cash rate] at least twice more," Ms Turner said.

The benchmark interest rate stands at 2.25 percent, and financial markets are fully pricing in a cut at the next RBNZ review on 11 August.

Data on unemployment, which currently stands at 5.2 percent, is released on 17 August.

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