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Labour Market Update - March 2010

Published: March 2010

The economic recovery gathers momentum…

The economy grew by 0.8% over the December 2009 quarter, the third consecutive quarterly increase (Figure 1). Growth over the quarter was the largest increase for two years and confirms the economic recovery in New Zealand is gaining momentum. GDP per capita also rose, up 0.5%, and was the first increase in two years.

The recovery became more broad-based in the December 2009 quarter with a strong rebound in manufacturing activity, as well as growth in wholesale trade, retail, and hospitality. These were all industries which were severely affected during the downturn, both in terms of activity but also job losses. Overall employment in manufacturing, retail and hospitality is down by 58,600 since December 2007. Manufacturing activity rose by 4.5% in the December 2009 quarter as domestic demand recovered, manufacturers benefited from strength in the Australian economy, and firms began to rebuild their inventories. Increased consumer confidence in late 2009, as shown in a range of consumer surveys, saw household spending increase which supported the retail and hospitality sectors.

Fig 1: Quarterly Economic Growth

Fig 1: Quarterly Economic Growth
Source: Statistics New Zealand

Data table for Figure 1

Fig 2: Employment Intentions

Fig 2: Employment Intentions
Source: National Bank

Data table for Figure 2

…and the labour market is close to a turning point…

Although the unemployment rate rose to 7.3% in the December 2009 quarter, the number of people employed was relatively steady after large declines were reported in the first three quarters of 2009. Employment fell by a total of 51,000 people over the first nine months of 2009. Strong economic growth over the December 2009 quarter, as well as other more recent indicators which show an increased demand for workers, is consistent with a labour market that is reaching a turning point.

The Department of Labour’s Jobs Online index showed a 6.6% rise in the number of advertised vacancies in the three months to February 2010 while the National Bank Business Outlook for February reported a net 9.3% of firms intend to increase staffing levels over the next year. Employment intentions are now well above their long-term average of 5.9% (Figure 2).

…with employees also confident about the future

Workers are also positive about the outlook for the labour market. The Westpac-McDermott Miller Employment Confidence Index showed employees remained optimistic in the March 2010 quarter. Employees are downbeat about current labour market conditions but their employment outlook for the year ahead is at a high level. A net 14.3% of respondents said they expect job opportunities to be plentiful in March 2011. Confidence improved among young people, despite being hit hard during the recession, and also for people in Wellington, Otago and Auckland.

Labour productivity set to rebound strongly…

Official productivity statistics show labour productivity declined by 1.5% in the year to March 2009 which is typical during a downturn as output falls by more than hours worked. However, coming out of the downturn, labour productivity growth is expected to rebound strongly as labour and capital are more fully utilised. A crude measure of economy-wide labour productivity growth (GDP per hour worked) shows labour productivity rose by 0.7% in the year to December 2009.

…with economic growth expected to be robust over 2010…

The outlook for the economy continues to improve with solid growth expected over the next year, albeit at weaker levels than seen in previous recoveries. The average prediction in the March 2010 NZIER Consensus Forecasts is for the economy to grow by 3.1% in the year to March 2011, up from an expectation of 2.8% growth in the December 2009 survey. However, uncertainty around the outlook remains and GDP is still 2.1% below the historical peak reached in December 2007. Activity is not expected to return to its pre-recession level until later in 2010.

…as business and consumer confidence remains high…

A net 50.1% of respondents expect general business conditions to improve over the next year according to the February 2010 National Bank Business Outlook. This is the highest figure since 1999 when the economy was last recovering from a recession. Construction, manufacturing and the service sector remain the most optimistic. Consumer confidence also remains historically high, despite recent easing.

…and a rise in business investment is a positive sign for employment growth…

There was strong growth in the key areas of business investment in the December 2009 quarter with investment in plant & machinery and transport equipment up 4% and 7% respectively. This signals that firms have begun acting on the increased business confidence reported over the second half of 2009 and it is a positive sign for a return to employment growth in coming quarters, as suggested by firms’ hiring intentions.

…although employment will lag the wider recovery…

Despite expectations of continued economic growth, employment is unlikely to record any substantial increases until the second half of 2010. With a significant amount of spare capacity in the current workforce, the rise in labour demand is likely to be met by initially increasing the hours of current staff and then by hiring additional workers. As a result, any employment growth in coming quarters is unlikely to be strong enough to absorb many new entrants into the labour force and prevent further small increases in the unemployment rate. We expect the unemployment rate will peak at slightly above its current rate in the middle of 2010. The labour force participation rate however has been volatile over recent years, and this will be a key determinant of the peak unemployment rate.

…and the unemployment rate is expected to remain elevated

It is likely that the unemployment rate will remain elevated into 2011 given a modest recovery in employment is expected. Continued high rates of labour force participation and strong population growth, on the back of above average net migration inflows, will contribute to keeping the unemployment rate high. The average prediction in the March 2010 NZIER Consensus Forecasts is for the unemployment rate to fall to 6.2% in March 2012.