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The Reserve Bank of New Zealand is not likely to materially change its view after the latest labor force survey data, Westpac bank economist Brendan O'Donovan said in a note on Thursday. The data tends to support the central bank's dovish stance relative to the market, he wrote. Further, the economist said the data confirmed the severe toll that the recent recession took on New Zealand's labour market.
The official Household Labour Force Survey results for the third quarter showed on Thursday that the unemployment rate jumped a further half percentage point to 6.5%, the highest in nine years. The rate of increase in unemployment has been every bit as severe, the economist said, with one out of every 31 Kiwi workers becoming unemployed in the past year and a half.
Drawing attention to the 0.7% fall in hours worked that came on top of a 1.9% fall last quarter, Westpac said it believes that the economy may have grown by less than its 0.4% Q3 GDP forecast. The firm had expected to see a lift in hours worked, reflecting an increase in economic activity over the quarter. However, Westpac noted that Swine flu may have had an impact on the number of hours people worked in the third quarter - 'usual hours worked', which includes time spent on sick leave fell only 0.2%.
The Westpac economist partly viewed the decline in the participation rate to 68.0% from 68.4% as a quarterly volatility. Taking note of the trend participation rate that has now eased from its peak of 68.9% to 68.1%, he said falling labour force participation is the normal response after a period of rising unemployment. O'Donovan explained that it is because potential workers become discouraged and pursued other opportunities such as early retirement or study. "These people are the hidden unemployed. We have long argued that the rise in labour force participation from 2004 - 2008 was mostly cyclical, not structural."
As employment and participation fell in lock-step once again, the size of the fall in employment must be treated with caution, the economist wrote. Earlier, Westpac had predicted that Q3 would be unaffected by the strange pattern that has developed in the HLFS.
The third quarter may have been the last quarter of sharply rising unemployment, Westpac said. The firm forecasts the unemployment rate to remain close to its current level in 2010, with movements up or down of a couple of tenths of a percent.
Though the latest set of data indicated that the economy was slightly weaker than previously thought in the third quarter, forward looking indicators are still powering ahead, especially in the housing market and commodity price spaces, Westpac noted. In its view, the central bank will be able to maintain its dovish stance only until New Year. "We continue to expect inflationary pressures will become too much to bear by March 2010, when the RBNZ will kick off its hiking cycle", the firm said.
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