Published: 22 September 2011

Key points:

• The economy experienced slower than expected growth in the June 2011 quarter, following a sharp rise last quarter
• The labour market is improving, with the unemployment rate expected to fall to 6.0% by 2012
• Skilled labour is getting harder to find and wage growth is likely to increase over the next two years.

Economic growth slowed in the June quarter…

Economic activity increased by 0.1% in the June 2011 quarter (Figure 1), following a revised 0.9% increase in March 2011 and 0.6% increase in December 2010. The mild growth was below market expectations of a 0.5% increase. Annually, economic activity grew by 1.5%. The weakness in the June result was mainly driven by a contraction in the construction and mining sectors. Future growth may be constrained by the weak and volatile global economy.

Fig 1: Quarterly economic growth

Source: GDP, Statistics NZ

Data table for Figure 1

The quarterly growth was led by increases in agriculture (up 4.3%), finance, insurance, and business services (up 1.5%), and retail trade (up 1.2%). Favourable weather conditions, increased milk production and high commodity prices helped to lift activity in the agriculture industry. 

However, construction activity declined by 4.3%, following a 4.4% decline last quarter. Manufacturing activity contracted by 0.1% over the quarter after two consecutive quarters of strong growth.

…with households spending more

Household spending grew by 0.3% over the quarter. The increase in retail trade activity over the quarter was driven by a rise in spending on durable goods (up 1.1%). In contrast, household expenditure on non-durable goods fell by 1.3%.

Although households are spending more, they remain cautious and continue to look to pay off debt or increase savings.  Higher food prices and a subdued housing market will constrain household spending. However, as the economy and labour market continue to improve, household spending is expected to grow modestly in line with their income growth.

The labour market stabilised over the June quarter…

The latest Household Labour Force Survey (HLFS) showed a modest increase in employment (1,000 people), while the number of unemployed people (154,000) and the unemployment rate (6.5%) remained unchanged (see Figure 2 and 3). The labour force participation rate dropped slightly from 68.6% to 68.4%, but is still at a high level.

Fig 2: Employment Growth

Source: HLFS, Statistics New Zealand

Data table for Figure 2

 

Fig 3: Participation and unemployment rate

Source: HLFS, Statistics New Zealand

Data table for Figure 3

Following strong growth in employment in the March 2011 quarter, June’s modest result was characterised by an increase in full-time employment (up by 0.2%, or 4,000 people) and a decrease in part-time employment (down by 0.1%, or 1,000 people).

Nationally, the underlying trend continues to show a gradually improving labour market. Employment is 2.0% higher than a year ago, and labour force participation has increased by 0.3 percentage points (up from 68.1% to 68.4%). The unemployment rate fell from 6.9% to 6.5% over the year. 

…Canterbury employment fell over the year…

This quarter’s HLFS results are the first to capture the wider Canterbury region following the February earthquake. Compared with last June, there was a modest fall in employment (down 3.6%, or 12,300 people), a rise in unemployment (up 17.8%, or 3,000 people), and a fall in labour force participation (down by 1.4 percentage points). While there has been some impact, the fall in employment was less than anticipated. 

…while wage growth gradually recovered

The June 2011 quarter data confirms that wage growth is gradually recovering, albeit from very low levels (Figure 4). The adjusted Labour Cost Index (LCI, which measures changes in pay rates for a fixed set of jobs and excludes performance-related pay increases) rose by 0.4% over the June 2011 quarter, lifting annual wage growth to 1.9%. The latest annual wage growth is at the same level as was recorded for the year to March 2011, but is up from a 1.6% increase for the year to June 2010.

Annual wage growth in the QES^[1] was 3.1% for the year to June 2011, up from 2.6% for the year to March 2011 and 1.1% for the year to June 2010. After four consecutive increases, the unadjusted LCI (which includes performance-related pay increases) eased slightly from 3.6% for the year to March 2011 to 3.4% for the year to June 2011. 

Fig 4: Wage growth measures

Source: LCI, QES, Statistics NZ.

Data table for Figure 4

Economic growth is expected to increase over the coming year… 

The Rugby World Cup and the reconstruction of Canterbury are expected to see economic growth improve in late 2011 and strengthen in 2012. Modest household spending and elevated export revenues will also provide some support to the economic growth over the coming year. However, slower trading partner growth and increased global economic and financial risks may put a damper on the export sector. Nevertheless, the average prediction in NZIER’s Consensus Forecasts is for the economy to expand by 2.6% in the year to March 2012, once the rebuild gears up.

…while the labour market continues to strengthen

Recent data indicates that the labour market is set to strengthen further over the second half of 2011 and grow strongly over the next two years. The Department of Labour’s Jobs Online revealed rising advertised vacancies, illustrating the improving employment prospects in the economy. The Department’s Lead Employment Indicator, released in early August, suggested employment would increase by 0.6% in the September 2011 quarter and by between 0.4% and 0.6% in each of the following two quarters. While the Rugby World Cup is likely to boost employment in the immediate term, the National Bank’s Business Outlook reported above average employment intentions over the next 12 months. We expect further increases in employment over the next two years with the unemployment rate continuing to trend down slowly, falling to 6.0% by 2012. 

Although the unemployment rate remained steady over the June quarter, labour is getting difficult to find, particularly skilled labour. The situation is likely to intensify as the labour market strengthens. 

With an improving labour market, wage growth is expected to grow further over the next two years, accelerating from 2012, particularly in the construction sector due to the Canterbury rebuild.

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