The first three months of 2021 was supposed to be a real test of New Zealand’s economic strength as the reality of the pandemic border closures hit home.
Today’s remarkably strong labour market data shows it was a test that we have passed.
Unemployment fell to 4.7 per cent in the March quarter, beating the expectations of even the most optimistic economists.
Employment rose 0.6 per cent (quarter on quarter) beating consensus forecasts of 0.3 per cent.
With no international visitors through the traditional peak of the tourist season, a second year without foreign students and no more wage subsidies to fall back on, this was where things were supposed to get ugly.
Instead unemployment continued to fall, we continued to create jobs and the problems facing most businesses were those of an economy running too hot.
In short, the economy did not tank and the data suggests that – barring further lockdowns – we’ve now seen the worst the pandemic will throw at us.
“The result reinforces the sense that the New Zealand economy is past the worst of the Covid-19 shock,” said Westpac acting chief economist Michael Gordon.
“The unemployment rate of 5.2 per cent in the September quarter last year will prove to be the (surprisingly low) peak in this cycle.”
The 4.7 per cent unemployment rate was a “fantastic outcome”, said KiwiBank chief economist Jarrod Kerr.
The pandemic labour market had completely confounded forecasters, he said.
“During the depths of the nationwide lockdown, a double-digit unemployment rate had seemed more likely than not.”
While there was no doubt that fiscal support was instrumental in safeguarding employees, businesses had also shown high levels of adaptability, he said.
There were 15,000 jobs created over the first quarter, with 5000 fewer unemployed.
The labour force participation rate rose from 70.2 per cent to 70.4 per cent, as people rejoined the workforce or sought more hours.
And firms had offered a larger carrot, to get workers, Kerr said.
Wages lifted 0.4 per cent over the quarter, to be up 1.6 per cent over the year.
“Wages will jump again in the second quarter, as the April 1 minimum wage hike kicks in,” Kerr said.
“The recovery momentum is likely to continue.”
The data echoed recent surveys highlighting tighter labour market conditions and growing concerns around labour shortages, said ASB chief economist Nick Tuffley.
It also provided “further evidence of how well the New Zealand economy has performed through the global pandemic, with the level of employment higher than pre-pandemic levels”, he said.
“The labour market unequivocally paints a picture of tight, and tightening, labour market conditions,” said BNZ head of research Stephen Toplis.
“A picture which, incidentally, fits with the swathe of anecdotal evidence from businesses, from many sectors, that they can’t access their appropriate labour needs.”
ANZ senior economist Miles Workman said he expected job growth to continue into 2021 although further gains would be “hard won”.
“We’re expecting to see demand pressures in the labour market continue to build, and spill over into higher wage inflation over the next few quarters, while employment growth may struggle to keep up with rising participation,” he said.
“Although today’s data have shown, encouragingly, that more Kiwis are having success in their job-hunting.”
The result was so strong, said Sydney based Capital Economics, that the Reserve Bank would have to start lifting interest rates next year.
“Our view that the labour market is set to tighten much faster than the RBNZ anticipates is one reason why we expect the Bank to begin raising rates by the end of next year,” said economist Ben Udy.
Other economists were more cautious about the Reserve Bank reaction.
The data would embolden calls for the RBNZ to hike rates and put upward pressure on the dollar, said ANZ’s Workman.
The news did see the kiwi dollar rise almost a quarter of a cent against the US dollar.
It was too soon for the RBNZ to declare “mission accomplished”, Workman said.
But the data represented an advance towards the RBNZ’s maximum sustainable employment goal and would keep the spotlight on inflation.
There’s no doubt New Zealand’s growth rate slowed at the end of 2020 with the end of the post-lockdown spending spree.
But the economy is now benefiting from a second shot in the arm (so to speak) as major trading partners emerge from lockdown and experience their own burst of rebound growth.
That’s driving strong demand for New Zealand exports and pushing commodity prices to new heights.
The ANZ World Commodity Price Index lifted 2.3 per cent in April to extend its record high.
Meanwhile, new Reserve Bank data shows household balance sheets have strengthened and savings levels have increased.
With $16 billion more sitting in bank deposits now than before the pandemic, Kiwis still have cash to spend.
The pandemic will continue to create challenges around this economy’s capacity for growth – labour shortages, supply disruptions and cost increases.
But, for now, at least, it appears the risk of a Covid crash is behind us.
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