Unemployment tipped to dip further; "a more aggressive interest rate track" an option
Unemployment rates would likely slip further and unless there are soon signs the “worm is turning,” the Reserve Bank will have to consider “a more aggressive interest rate track,” according to BNZ economists.
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The BNZ economists said an easing in NZ labour market’s very tight conditions is a “critical precondition” for RBNZ to stop lifting interest rates.
In the BNZ’s latest Market Outlook publication, Stephen Toplis, BNZ’s head of research, said with labour supply continuing to deteriorate, due to a combination of the resurgence in COVID and rising net migration outflows, demand for labour “simply must abate” if the central bank is to hit its targets, interest.co.nz reported.
“Unless there is clear indication soon that the worm is turning on the labour market front, the RBNZ will have to contemplate a more aggressive interest rate track than it suggested at its May MPS [Monetary Policy Statement] in order to achieve the unemployment forecasts it predicted at the time,” Toplis said.
In that May MPS, RBNZ predicted the OCR to reach nearly 3.5% by the end of this year with a peak of just under 4% by mid-2023. The OCR currently sits at 2.5%, with widespread expectation of another 50 points hike to 3% at its next review on Aug. 17.
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Prior to the next RBNZ decision, Statistics New Zealand will publish the full suite of labour market data for the June quarter on Aug. 3. As of the end of the March quarter, unemployment was 3.2%. In the May MPS, RBNZ predicted unemployment to slip to 3.1% in the June quarter, then start rising again, reaching 3.5% by the end of 2022.
Toplis pointed to the ongoing labour market tightness as “our greatest fear” in terms of the upward pressure on interest rates.
“The RBNZ forecasts the unemployment rate to rise to 3.5% by the end of this year. We, in contrast, see it falling to 3.0% or below,” he told interest.co.nz.
Toplis pointed to the “parlous” state of both business and consumer confidence as a critical determinant in the evolution of the New Zealand economy over the next twelve months.
“Morose householders do not spend; and upset businesses neither hire nor invest,” he said. “When both businesses and consumers are unhappy then there is little chance that an economy will flourish.”
Commenting on ANZ’s consumer confidence survey series, the BNZ leader said consumer confidence has sat at record lows of 77.9 up to 84.4 over the past five months.
“In the first instance, rampant inflation poleaxed hopes and aspirations but, more recently, rising interest rates will have played their part as household disposable incomes are further eroded,” Toplis said.
Such low levels of sentiment, Toplis said, were consistent with a resultant sharp drop in retail spending.
“The last time consumer confidence got anywhere near as low as its current levels, retail sales fell a cumulative 8.7% in real terms,” he said. “We are not forecasting such a large drop this time around, largely because we think that the labour market will remain relatively tight, but we still think a correction of some sort is highly likely. The biggest hits will occur for discretionary goods and services, and durable goods. Durables spending will also suffer from the increased 'leakage' of money used for offshore holidays and the fact that there was a massive run up in durables spending during the Covid lockdowns.”
Toplis said there could only be a marked improvement in confidence levels when inflation, more generally, starts to decline and house prices stabilise.
“And confidence is yet to be impacted by an inevitable increase in the unemployment rate,” he said.
Toplis said the ANZ’s Business Outlook survey this week will provide further insight into labour market developments, interest.co.nz reported.
