We have been diligently investigating all the data we can locate relevant to the prospects for employment in New Zealand. Despite the negative sentiment coming through we cannot find the widely expected black hole in New Zealand employment.

We have been saying for over a year that the employment market is easing, but that employment is resilient and not ‘falling out of bed’. There are certainly some industries that have been driven by our monetary policy stance (i.e. high interest rates, a widely fluctuating cycle in exchange rate with an uncomfortably high peak) into a deep restructuring. The forest and wood industry is one, and as Dave Anderson of Winstone Pulp International said about job losses at Blue Mountain Lumber, some of this was inevitable but made tougher and earlier by the sharp global drop in demand for wood products.

The overall picture from the Household Labour Force Survey (HLFS) has included these restructuring changes in wood, whiteware and related sectors. But, overall employment has remained resilient through to and including the December 2008 quarter. The processing and manufacturing sector reported sales were down by 5% in the December quarter, as to be expected given the worldwide ‘halt’ over that period. Even so, employment in this industry declined by only 7,000. And remember there was an overall increase in employment of over 18,000 in this quarter even though it is the third one in a row with a small reduction in GDP.

These quarter-by-quarter reductions in GDP volume are less than half of 1%, and therefore probably in the margin for error. Nevertheless, they have been negative enough for a howling chorus from the media and their commentators from the globally-discredited financial sector of ‘deepening recession’ and even ‘oncoming depression’.

It is this dominantly negative atmosphere that is now showing through in various industry confidence surveys. This atmosphere could push overall positive employment trends into negative territory for a couple of quarters.

Of course, this could be overcome if the apparent tug-of-war between competing political power bases and the consequent indecision at the centre is quickly settled. This would enable New Zealand leadership to announce and immediately start their ‘shovel-ready’ (and we hope ‘nail gun-ready’) practical package for infrastructure building and construction across all regions and relevant industries. We believe a small number of these projects are ready to go to tender, and we eagerly await their commencement.

The trend numbers continue

A consistent trend in employment across industries measured by the HLFS has resulted in a trend line for the last two years or more. This trend has seen an increase for all employment of 7,200 per quarter or 28,800 per year. The December quarter employment did not show any weakening relative to this trend. In fact, the actual employment recorded was 2,207,200, 27,800 above the trend. However, December is often above the trend with employment increases in retail, hospitality, and the primary sector.

Trends can disguise large swings, for example increases in one industry disguising widespread weaknesses in all others. However, in this case all main industries or sectors had consistent trends over the 10 quarters. These trends or changes in employment per quarter have included a substantial decline of about 1,700 in construction; increases in trade and hospitality of over 4,100; an increase in business services of 2,000; an increase in social services and government of 2,900; and small but not significant reductions in primary, processing, and manufacturing. Manufacturing has had a number of hits over the last few years, and these have resulted in job losses of about 15,000 on the same quarter previous year. These individual changes total to approximately the 7,200 trend quarterly increase for total employment.
But, we are in a recession …

It is true that the measured volume of GDP has been declining each quarter from the March quarter 2008 to the September quarter 2008. The changes in the volume of GDP by industry have been very patchy over this period. As with the employment figures, the consistent negative has come only from the construction sector, which has shown declines each quarter, with a big hit of 5% in March and 4% in June. The fall moderated to just 1.2% in the September quarter. Of other industries, some have taken hits and returned to positive territory (finance and business services, personal services, agriculture); whereas others began reasonably well and by September were in decline (manufacturing and transport).

The point is that in the September 2008 quarter, there was red ink for six of the 11 industries covered, but even by the March 2008 quarter seven of the 11 industries had declines. Thinking back to the March, June and September period, there was certainly strong concern about the recession or depression, even though GDP was a small negative (0.4% or less ‘in the margin for error’) and employment had still increased by over 20,000 on the previous year. So why should we expect things to suddenly change?

… so, surely, employment MUST fall?

In calling this forecast it would be easy to overlook a moderate outcome. We shall not be forecasting a continuation of the trend increase of 28,800 a year, entrenched as it seems. But nor will we maintain our forecast of a zero increase in employment for year ending June 2009. What we are forecasting is a modest employment increase of 10,000 for the year to June 2009.

This allows for a considerable deterioration in conditions between December 2008 and June 2009. We consider this forecast allows for the impact of the negative sentiment being promulgated around the economy. In addition, we incorporate the possibility of another bad quarter for the secondary sector, as well as some government interventions. The latter factor could well cause employment in social services and government to decline from its 2,900 per quarter trend increase with actions similar to the Razor Gang emerging in a number of areas under this coalition government. Another bearish factor could be a seemingly inordinate delay in implementing a positive package in infrastructure and skills training.

We therefore expect modest employment growth in 2010 and 2011. Our forecast is for a 10,000 increase in the year to this June; 22,000 to June 2010 and back up to 35,000 in the year to June 2011.

Unemployment and migration

The unemployment rate was 4.0% in September and increased (some media said it blew out to a six-year high) of 4.3% in December. The dynamics of the whole labour force picture will, we forecast, see the unemployment rate increase to 4.7% in June 2009, and break 5% to 5.2% by June 2010. It should ease to 5.1% by June 2011.

While this is greater than recently it is driven as much by an increase in the labour force participation rate and ongoing net migrant inflow as an under-creation of jobs. The participation rate was 68.3% in June 2008 and our forecasts show it increasing to 68.5% by this June and 69% by June 2011.

The strong migration inflow from Europe and North America (including Kiwis returning from extended, wealth-creating OEs) hit about 40,000 a year in 2001, has stayed thereabouts since, and has recently climbed again to over 42,000. This flow, and that from Asia, underpins our net inflow at present. We appear to be drifting along at a low of just 3,000 to 5,000 net inflow at present. But we forecast a slight firming of this, to reach a modest 8,000 a year by June 2011. There could well be an up side to this forecast with New Zealand gaining an increased skills inflow.

The recent announcement that Australia no longer sees building skills and some others as essential could reduce or reverse our exodus, particularly if we start taking some action on housing upgrades, infrastructure building, and construction. The answers are simple and remain the same in New Zealand’s resilient labour market.

Reprinted from BERL Forecasts March 2009