Confidence in the labour market rose strongly in December, reaching its highest level since early 2008, but wage pressures remain tepid.
The Westpac McDermott Miller employee confidence index rose 6.8 points to 121.3 in the December quarter, where a reading of 100 separates overall optimism from pessimism.
“The labour market is in great shape according to employees,” said Westpac chief economist Dominick Stephens. “Demand for workers has remained strong, and the official unemployment rate has fallen to its lowest in more than a decade. The shoe that has yet to drop is a pickup in wage inflation.”
Meanwhile, business confidence improved somewhat in the December quarter but still remains deeply pessimistic, the latest quarterly survey of business opinion by the New Zealand Institute of Economic Research shows.
However, firms’ views of their businesses’ prospects in the next three months nudged upwards into positive territory, reflecting improving demand.
A net 18 percent of businesses still expect business conditions to worsen over the next six months, although that’s significantly better than the net 28 percent expecting worsening conditions in the previous quarter. That had been the worst reading since March 2009.
And now a net 17 percent now expect their own business activity will pick up in the next three months, up from 11 percent three months ago, and a net 4 percent reported an actual improvement in the December quarter, up from zero last quarter.
Pessimists and optimists are netted off against each other to produce the overall index figures.
The big driver for business confidence has been improving demand “making firms more optimistic about expanding,” says NZIER principal economist Christina Leung.
“There was a rebound in hiring in the December quarter while hiring intentions for the next quarter remain positive,” she says.
A net 5 percent of businesses hired more people in the December quarter and a net 13 percent are expecting to hire more workers this quarter.
But a net 53 percent say skilled labour has become harder to find, up from 44 percent last quarter, and 35 percent report difficulties in hiring unskilled staff, up from 29 percent.
“Firms are also looking to increase new investment in plant and machinery over the coming year. However, firms are more cautious when it comes to new investment in buildings,” Leung says.
When it comes to the Westpac McDermott Miller employee confidence index, the biggest contributor to the quarterly result was a sharp lift in households’ perceptions of current job opportunities. That rose to 28.1 from 12.4 in the prior quarter.
This measure tends to closely follow the official unemployment rate which stands at 3.9 percent.
The survey also saw a strong lift to 21.7 from 10.3 in perceived job security. It was its highest since September 2007 – another sign that firms are looking to hold on to good workers in a tight labour market, said Stephens.
Expectations of future job opportunities saw a more modest gain, rising to 1.2 from negative 0.2.
However, while the balance of workers reporting higher earnings over the past year rose in the December quarter, this merely reversed a fall in the previous two quarters, he said. It stood at 30.2 from 22.8 in the prior survey.
Meanwhile, expectations for pay increases during the next year actually fell to 25.6 from 27.5.
“Moreover, both of these measures have been moving back and forth within a narrow range for several years, with no clear sign of a pick-up in the years since the Global Financial Crisis,” said Stephens.
Back to the NZIER business confidence survey, and Leung says weak profitability remains a concern. The survey shows a net 22 percent experienced profit declines in the December quarter, down a touch from the 23 percent reporting actual profit falls three months ago.
A net 15 percent are expecting deteriorating profits this quarter, the weakest level since March 2011, up from 7 percent three months ago.
The survey suggests those figures reflect building inflationary pressures with a net 47 reporting rising costs in the December quarter, up from 44 percent three months ago.
But it looks like firms are finding it difficult to pass on rising costs.
A net 21 percent are expecting to raise prices this quarter, down from 28 percent three months ago.
Manufacturers remain the most pessimistic. While both export and domestic demand improved, their profitability remains weak.
Retailers report a pickup in sales but say costs continue to rise and that profitability is weak.
NZIER is forecasting the December quarter GDP figures – not due until late March – will show the economy grew 2.5 percent in calendar 2018 but this latest survey suggests it grew only about 2.2 percent.
She says she expects the Reserve Bank will hold its official cash rate through to early 2020 and a net 6 percent of firms are expecting interest rates to fall over the coming year.