by Nick Clark, National Manager General Policy
Labour market softening?
Statistics NZ’s quarterly Labour Market Statistics show the unemployment rate has increased a little, adding to a growing narrative of an economy facing recession and posing questions for the Reserve Bank as it thinks about its next move on the OCR.
The Household Labour Force Survey showed 99,000 people unemployed in the December 2022 quarter, up 2,000 from the September quarter, and translating into a small increase in the unemployment rate from 3.3% to 3.4%. Employment was up by only 4,000, which is much weaker than the 36,000 increase for the previous quarter.
Both the labour force participation rate (71.7%) and the employment rate (69.3%) remained unchanged at the highest rates recorded since the survey began in 1986. However, the underutilisation rate, a broader measure of spare capacity, increased from 9.0% to 9.4%.
Meanwhile, wage inflation continues to rise. For the year to the December 2022 salary and wage rates (including overtime), as measured by the Labour Cost Index, increased 4.1%, compared with 3.7% in the year to September 2022. Average total weekly earnings (including overtime) per full-time equivalent employee, as measured by the Quarterly Employment Survey, was up 7.2% for the year.
The slowing in employment growth and rises in the rates of unemployment and underutilisation suggest the labour market might be easing. On the other hand, the unemployment and underutilisation rates still remain very low, the rates of labour force participation and employment remain at record highs, and wage growth continues to be strong. Business surveys continue to cite severe labour and skill shortages.
What does this mean for the Reserve Bank’s OCR decision on 22 February? Some economists are now saying it should go easier and change from a 75-point increase to a 50-point increase or even just a 25-point increase and also aim for a lower peak rate of around 5% rather than 5.5% previously forecast. Yet inflation remains far too high and also broad-based while cost and pricing pressures remain acute.
The Reserve Bank should want clear evidence of easing inflationary pressures before going easier. I’m not sure it is clear enough yet.
Cost of living
The cost of living for the average household increased by 8.2% in the 12 months to December 2022, according to Statistics NZ’s quarterly Household Living Costs Price Indexes. This compares to an increase of 7.2% for the Consumer Price Index (CPI).
The main difference between the Household Living Cost Price Indexes (HLCPI) and the better-known CPI is that the HLCPI captures mortgage interest payments, which increased 45% for the year on the back of higher interest rates.
The increase in the cost of living was felt most acutely by the highest spending groups, increasing 9.4% for them, whereas for the lowest spending groups the increase was ‘only’ 7.1%. The main contributor to this disparity was higher interest payments, because highest-spending households spend more of their expenditure on interest payments than other household groups.
Business gloom eases – a little
After plummeting to a record low in December, the new year has seen a lift in business confidence, although it remains deeply negative.
ANZ’s monthly Business Outlook Survey showed that business confidence rose 18 points to a net 52% expecting general economic conditions to worsen over the coming year. For agricultural respondents a net 80% expected conditions to worsen, a 20-point improvement from the net 100% recorded in December. They were the most negative sector.
Turning to own activity, the more reliable indicator for economic growth, a net 16% of respondents expected their activity to reduce over the coming year, an improvement of 10 points. Agricultural respondents were however more pessimistic about their activity with a net 20% expecting it to reduce, a worsening of 8 points.
Overall, across all respondents, cost expectations remain acute with a net 91% expecting them to increase, up 7 points, while pricing expectations were up 3 points to a net 62% expecting to raise their prices. Investment intentions, employment intentions, profit expectations, and ease of credit expectations all improved compared to December, but all remain negative.
Inflation expectations for the year ahead eased from 6.2% to 6.0% but remain elevated. Agriculture’s expectation was the highest at 6.3%, but it was down from 6.9%.
Has dairy debt bottomed out?
Agricultural sector lending was down a little in December but it was up for the year, according to the Reserve Bank’s monthly Sector Lending Statistics.
In December 2022, agricultural sector lending was $61.98 billion, down $15 million on November but up $168 million (0.3%) from December 2021. There were differences within the sector:
- Dairy cattle farming: $36.47 billion, up $56 million for the month but down $700 million (or 1.9%) for the year. Dairy lending appears to have ceased falling over recent months.
- Sheep, beef cattle, and grains farming: $15.12 billion, down $140 million for the month and down $40 million (or 0.3%) for the year.
- Horticulture: $7.27 billion, up $21 million for the month and up $861 million (or 13.4%) for the year.
- Other agriculture on farm: $2.29 billion, up $21 million for the month but down $117 million (or 4.9%) for the year.
In contrast to agriculture’s annual 0.3% increase, annual growth in housing lending was 4.4%, continuing its recent trend of slowing annual growth, while personal consumer debt was up 1.2%. Business lending was up 7.9%.
Exports growth continues, imports slow.
December saw a solid increase in exports, again driven by dairy products, and a sharp slowing in imports.
Statistics NZ’s monthly Overseas Merchandise Trade Statistics show goods exports were worth $6.7 billion in December 2022, up 10.5% compared to December 2021.
Dairy led the way. Milk powder, butter, and cheese exports were up 17% to $2.4 billion; preparations of milk, cereals, flour, and starch up 20% to $262 million; and caseins and caseinates up 30% to $193 million.
Exports of meat and edible offal were down 9.1% to $816 million, although wool was up 15% to $55 million.
Logs and wood articles were up 10% to $397 million, fruit up 9% to $30 million, and wine up 68% to $264 million.
Goods imports were worth $7.2 billion in December 2022, up 1.8% compared to December 2021, by far the smallest monthly increase since February 2021. Although petroleum and products had a 2.8% increase, most other major import categories had decreases, including fertiliser which was down 22%.
The goods trade balance in December 2022 was a deficit of $475 million, an improvement from the $990 million deficit for December 2021.
On an annual basis, for the year to December 2022, goods exports were $72.2 billion, up 13.7% on the previous year. For the key primary sector export commodities:
- Milk powder, butter, and cheese: up 21% to $20.6 billion.
- Meat and edible offal: up 12% to $9.8 billion.
- Logs, wood, and wood articles: down 4.6% to $5.2 billion.
- Fruit: down 2.3% to $3.8 billion.
- Preparations of milk, cereals, flour, and starch: up 22% to $2.5 billion.
- Wine: up 15% to $2.3 billion.
- Casein and caseinates: up 48% to $1.9 billion.
In addition, live animal exports were up 14% to $537 million. However, eggs, honey, and other animal products were down 10% to $450 million; vegetables down 3.5% to $464 million; and wool down 0.5% to $423 million.
Despite the slowdown in December, annual growth in goods imports was still huge, up 22.8% to $86.7 billion. Petroleum and products imports had an 76% increase to $9.9 billion. Fertiliser imports were up 34% to $1.4 billion and other chemical products a 104% increase to $1.7 billion.
The annual goods trade balance for the year to December 2022 was a huge deficit of $14.5 billion, $7.3 billion higher than the previous year’s deficit of $7.1 billion.
A slowing economy should take the heat out of import growth in 2023. In fact, it might already be happening if December’s result is a guide.
Employment falls in December
Employment dropped slightly in December, and continued to decline for the primary industries, according to Statistics NZ’s Monthly Employment Indicators.
In December 2022 there were 2,363,700 ‘actual’ (i.e., unadjusted for seasonal effects) filled jobs across the whole economy, up 38,800 (or 1.7%) compared to the same month last year. This follows a seasonally adjusted 0.1% decrease for the month of December compared to November.
There were 107,200 filled jobs in agriculture, forestry, and fishing, down 6,300 (or 5.6%) for the year. Seasonally adjusted jobs were also down for the month.
Employment in agriculture, forestry, and fishing has been falling. Labour shortages have been particularly acute in the primary industries and more recently sharply higher input costs are also causing many farmers and growers to cut costs where they can, which can mean deciding not to fill vacancies or in some cases restructuring their businesses.
With jobs growth slowing this might ease labour shortages.
Building consents down in December
After a rebound in November, Statistics NZ’s monthly Building Consents Issued for December have shown a decline in residential building consents.
In December 2022, there were 3,457 residential building consents, valued at $1.4 billion. The seasonally adjusted number of consents was down 7.2%, after rising 6.7% in November and falling 10.7% in October. For the year ended December 2022, the number of new dwellings consented was 49,538, up 1.1% from the year ended December 2021 but slipping below 50,000. These consents were valued at $20.2 billion, up 7.6% compared to the year before.
The annual value of non-residential building work consented was $9.5 billion, up 13% from the year ended December 2021. Out of this $304 million was for farm buildings, down 1.3%.
NIWA Soil Moisture Data.
NIWA’s latest soil moisture maps (as at 9am Thursday 2 February) show the effect of recent torrential rain and flooding with most of the North Island’s soils significantly wetter than usual for this time of year. There is a stark contrast with the South Island with conditions much drier than usual, especially so in Buller, Fiordland, and Southland.
Exchange Rates.
The NZ Dollar was a little stronger this week, up 0.2% against the Trade Weighted Index. It was stronger against the US Dollar, Australian Dollar, UK Pound, Japanese Yen, and Chinese Renminbi, but weaker against the Euro.
Source: Reserve Bank of NZ
Wholesale Interest Rates.
Over the course of the week, the yield for the 90 Day Bank Bill was up 6 points to 4.91% and the 10-year Government Bond yield was up 5 points to 4.13%.
The Reserve Bank next reviews monetary policy settings (including the OCR) on 22 February 2023.
| This Week (2/2/23) | Last Week (26/1/23) | Last Month (4/1/23) | Last Year (2/2/22) | |
| OCR | 4.25% | 4.25% | 4.25% | 0.75% |
| 90 Day Bank Bill | 4.91% | 4.85% | 4.71% | 1.17% |
| 10 Year Government Bond | 4.13% | 4.08% | 4.41% | 2.58% |
Source: Reserve Bank of NZ
