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Pre-election Economic and Fiscal Update 2017

Recent Developments (continued)

Unemployment is lower…

June quarter 2017 labour market data showed employment growth weakened in the quarter, although growth over the year grew at a robust pace, up 3.1% from a year ago (Figure 1.4). The decline in employment in June was driven by a fall in part-time employment, which tends to be highly variable from quarter-to-quarter. Full-time employment continued to expand, rising 0.7% in the quarter and 3.0% from the same quarter a year ago. The labour force participation rate declined 0.6 percentage points to 70.0 in the June quarter (Figure 1.4), and the unemployment rate fell 0.1 percentage point to 4.8%.

Figure 1.4 - Employment and labour force participation
Figure 1.4 - Employment and labour force participation.
Source: Statistics New Zealand

Annual growth in ordinary time hourly earnings of 1.6% in the year to June 2017 was driven by public sector wages, which rose 4.1% partly owing to collective pay settlements in the education sector, while private sector growth was more modest at 1.2% (Figure 1.5). However, private sector wages have recovered from a period of very weak growth over the second half of 2016, to an annualised rate of 2.0% over the first half of 2017. Although subdued wage growth is consistent with our view that some spare capacity remains in the labour market, wage growth is weaker than can be explained by excess capacity alone.

Figure 1.5 - Wage growth
Figure 1.5 - Wage growth.
Source: Statistics New Zealand

June quarter 2017 labour market data were received after the forecasts were finalised. Employment, participation and unemployment were lower than expected while wage growth was close to expectations. However, the differences were within the usual range of quarterly variation and do not materially alter our view of the labour market. Nonetheless, the lower unemployment rate and the decline in participation, alongside other indicators of labour market capacity, such as survey measures of the degree of difficulty finding labour, increase the risk that there is less spare capacity in the labour market than assumed[1]. In addition to uncertainty around the extent of spare capacity, it is difficult to determine the degree of inflationary pressure associated with reduced labour market slack. A number of countries with historically low unemployment rates are finding wage growth has not picked up to the same extent as in the past.

…and inflation has eased

Consumer price inflation eased to 1.7% in the year to June 2017 from 2.2% in March, partly reflecting lower fuel prices in the quarter (Figure 1.6). Non-tradables inflation was also a bit weaker and measures of core, or underlying inflation, also eased slightly. Overall, the lower inflation outturn appears to partly reflect some unusual reductions in some categories of prices, which will hold down annual inflation until they drop out of the calculation. The lower inflation reading also appears to reflect some factors that may be more long-lasting, including the rapid pace of technological improvement embodied in goods and services, which may delay progress in returning inflation to the 2.0% mid-point of the Reserve Bank's target range.

Figure 1.6 - CPI inflation
Figure 1.6 - CPI inflation.
Source: Statistics New Zealand


Nominal GDP growth reflects higher terms of trade and inflation over the year

Although annual inflation eased in June it has increased from 0.4% in June 2016 as the effects of previous oil price declines have dropped out of the annual calculation. The terms of trade have also improved significantly over the past year.

Gains in the terms of trade and higher inflation have supported growth in nominal gross domestic product (GDP), which includes movements in both real activity and prices (Figure 1.7). The faster pace of nominal GDP growth has flowed through to tax revenue, which is expected to be 1.3% ($1.0 billion) higher in 2016/17 than forecast in the Budget Update.

Figure 1.7 - Nominal GDP and the terms of trade
Figure 1.7 - Nominal GDP and the terms of trade.
Sources: Statistics New Zealand, the Treasury


  • [1]See the box entitled Uncertainty surrounding estimates of the output gap in the Risks and Scenarios chapter for further information.
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