The month of May is action-packed with the Government’s Budget (May 20) and the RBNZ’s Monetary Policy Statement (May 26). And this week, we get the RBNZ’s semi-annual Financial Stability Report (FSR). Unfortunately, even before its release, the FSR has lost some of its allure. We learnt last week in the media the RBNZ will not include a response to the Minister of Finance on DTI and interest only lending restrictions. The RBNZ is likely to release a response toward the end of May. So without DTIs, the RBNZ will update us on the stability of the financial system, after a near 25% spike in house prices. The RBNZ will also provide a preliminary assessment of the change to its remit, to take into consideration of the Government’s aim of sustainable house prices. Housing will continue to generate headlines this week.
The RBNZ will no doubt point to the reintroduction and tightening of LVR restrictions this year. In addition, the Government’s recent housing policy announcement is expected to impact house price and credit growth. It’s far too early to determine the effects of recent changes, particularly on making property investors’ interest payments a non-deductible expense for tax purposes. But anecdotes and realestate.co.nz activity data suggest an immediate cooling, albeit from very heated levels. We’re likely to hear from the RBNZ before month’s end on DTIs and interest only lending. Of course, demand side measures such as these do not address the actual problem, which is a supply shortage. We hope the Government’s Budget takes a few more steps to “accelerate” supply - and here’s why.
Beyond housing, the RBNZ will take heart from the performance of the economy in the Covid world. The global economy has emerged with vigour, after a difficult 2020. Tremendous monetary and fiscal policy support combined with a speedy vaccine rollout in the developed world has buoyed confidence. Kiwi export commodity prices continue to lift and support indebted areas of the primary sector such as dairy. Furthermore, the unemployment rate now looks more likely to have peaked at an astonishing low 5.3% in the current cycle. The welcome surprise in the labour market has eased fears around mortgage defaults and has given banks the confidence to continue lending. Of course it wouldn’t be much of an FSR without highlighting risks. And covid remains a major risk as NZ is early in its quest to vaccinate the population.
On the same day as the FSR, StatsNZ releases the March quarter labour market report. The labour market confounded forecasters last year. The unemployment rate peaked at 5.3% in the third quarter as the impact of covid took its toll. However, by the end of the year the jobless rate had fallen back to 4.9%. A double-digit unemployment rate had seemed possible during the depths of lockdown. Significant policy support, such as the wage subsidy, protected jobs through the worst of last year’s disruption. Looking at the March quarter we are picking a further fall in the unemployment rate to 4.8%. Despite the turbulence in activity caused by a closed border, labour market indicators held up surprisingly well (see COTW below). But with a closed border an expected increase in the participation rate will be more than offset by job creation in the quarter.
Wage growth, as measured by the private sector labour cost index, is expected to remain unchanged at 1.5%yoy. On a quarterly basis we see wage growth easing to 0.3%. Firms are expected to have held back on wage increases ahead of the minimum wage hitting $20/hr from 1 April. We are expecting a gear shift in wage growth in the second quarter as a result of minimum wage increases and base effects of subdued pay movements during lockdown.
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Kiwibank economists Jarrod Kerr, Jeremy Couchman and Mary Jo Vergara provide unique insights on the New Zealand economy.