Labour Market Update - March 2011
Published: March 2011
Economic growth remains weak…
Economic activity increased by 0.2% in the December 2010 quarter, reversing a 0.2% decline in the September 2010 quarter (see Figure 1). The small rise was on the back of a strong rebound in manufacturing activity (up 2.5%), a rise in construction activity, and a large increase in forestry exports.
The weak result confirms that the economic recovery effectively stalled over the second half of 2010 as domestic demand remained subdued, business confidence softened and the economy was hit by a number of shocks such as September's earthquake and storms, and an early summer drought. Real GDP has barely grown since the March 2010 quarter (see Figure 2) and with the February earthquake likely to reduce growth over the first half of 2011, the New Zealand economy is set to remain in a weak phase.
…as households continue to be cautious…
Activity in the retail trade industry fell by 2.0% over the December 2010 quarter, led by a decline in expenditure on durable goods. Although much of the decline is the result of a lull in activity following the rise in GST on October 1, households remain cautious in their spending decisions and continue to look to pay off debt or increase savings. The weakness in retail flowed through to a 2.7% decline in wholesale trade activity in the December 2010 quarter and a 0.4% fall in transport & storage activity. Hospitality also fell strongly, down 2.6% over the quarter. Higher food and oil prices as well as a subdued housing market will ensure that household spending remains weak in early 2011.
Fig 1: Quarterly economic growth
Fig 2: Quarterly real GDP
…with employment down over the December quarter...
The number of people in employment fell by 0.5%, or 11,000 people, over the December 2010 quarter. Employment has been volatile over the past year, however, and the December quarter result follows a large 1.1% rise in employment in the September 2010 quarter. Despite the volatility, the trend clearly shows that the labour market recovery slowed over the second half of 2010 as economic growth stalled.
…and the unemployment rate up
The fall in employment resulted in the unemployment rate rising from 6.4% to 6.8% in the December 2010 quarter, led by an increase in male unemployment. Despite the increase, the overall unemployment rate remains below the peak of 7.0% recorded a year ago. With the unemployment rate having edged slightly lower over the year, and employment up by 1.3%, the labour market was in a better position in the December 2010 quarter than it was a year earlier. Before the February earthquake occurred, the underlying trend was that of a labour market that was gradually recovering, albeit at a slower pace than we had previously expected.
The earthquake will have a negative economic impact over early 2011…
Economic growth is expected to be weak over the first half of 2011 due to the disruptions caused by the February 22 earthquake in Canterbury. The average prediction in NZIER's Consensus Forecasts is for the economy to contract by 0.2% over the March 2011 quarter. The immediate disruption will impact most severely on consumer spending, business activity, and tourism, with the Christchurch CBD hit far harder than in the September 4 earthquake. The disruptions will be felt mainly in industries such as construction, retail, hospitality, manufacturing and business services.
…although growth is expected to pick up later in the year…
As the economic disruptions from the earthquake diminish, growth is expected to pick up over the second half of 2011. Robust trading partner growth, high commodity prices, low interest rates, the Rugby World Cup and the early stages of reconstruction from the earthquake are expected to see growth rise in late 2011 and strengthen in 2012.
…with the rebuild boosting growth in 2012 and beyond
The damage from the two Canterbury earthquakes is currently assumed to be around $15 billion, which is equivalent to around 8% of annual nominal GDP. While the rebuild will provide a significant boost to investment, it is not expected to fully commence until 2012. Demolition and land stabilisation, as well as the time required to obtain insurance assessments and consents, are likely to delay reconstruction until next year. Although there is significant uncertainty around forecasts and estimates of the damage, the Treasury currently predicts economic growth of 4.2% for the year to March 2013. Because of the extent of damage and the likely capacity constraints, rebuilding is expected to continue for at least 5 to 10 years.
Fig 3: Employment intentions
Fig 4: Annual growth in hours worked
The labour market had been showing signs of further recovery…
Data released before the February earthquake had suggested that the labour market was set to improve over 2011. Employment intentions were positive (see Figure 3), advertised vacancies were rising and, although employment fell in the December 2010 quarter, total hours worked continued to trend upwards (see Figure 4). Furthermore, the Department's Leading Indicator of Employment, released in early February, suggested employment would increase by between 0.1% and 0.4% in the March 2011 quarter and by between 0.5% and 1.0% in each of the following two quarters.
…but the earthquake has changed the outlook for the labour market
In the short term, the negative effects of the earthquake are likely to see the unemployment rate remain elevated. The Department expects the unemployment rate to remain around its current rate of 6.8% over the first three quarters of 2011 before gradually trending down. However, once the rebuild gathers momentum over 2012, employment is expected to rise strongly which should see the unemployment rate fall relatively sharply over 2012 and 2013.