A mixed response to ever-changing risk sentiment and economic data helped drive a two-sided finish in the Australian and New Zealand Dollars last week. In Australia, it was an inconclusive employment report that raised some flags about the economy. Meanwhile, another weak quarterly New Zealand CPI report increased the chances of a recession.
Australia Unemployment Hits 22-year High Though Jobs Surge
Australia’s jobless rate edged up even though employment surged by a record in June, as more people searched for work encouraged by the re-opening of the economy from the coronavirus lockdown.
Employment rose by a blockbuster 210,800 in June following hefty declines in April and May, Australian Bureau of Statistics (ABS) data showed last Thursday. That handily beat forecasts for a gain of 112,000 in a Reuters poll.
Yet, the jobless rate still hit a 22-year high of 7.4% because the surge in jobs growth was not enough to offset the increase in the number of people who went looking for work. The participation rate in June rose by 1.3 percentage points to 64%, the highest since April, driving unemployment higher.
The number of unemployed people increased by 69,300 to 992, 300 in June – around a third more than the jobless numbers during the 2008 global financial crisis.
NZ June Quarter CPI Data Raises Spector of Deflation
Low oil prices drove New Zealand’s consumer price inflation down by 0.5 percent over the June quarter, making for a 1.5 percent gain over the year, and raising the possibility of deflation further out.
The quarterly drop in the consumer price index (CPI) was in line with market expectations.
Stats NZ said transport costs fell by 4.9 percent over the quarter, influenced by lower prices for petrol (down 12 percent).
Aussie and Kiwi traders are likely to continue to follow the choppy trade in global equity markets since there are still many traders who believe the global economy is on a path to a quick recovery despite the surge in coronavirus cases in the United States and globally.
However, last week’s Australian jobs data and New Zealand’s CPI data did reveal that there are a few cracks in the economy and that the road to recovery may not be that easy after all.
After the release of the Aussie jobs report, economists said the jobless rate would have been even higher at well above 11% were it not for a government wage subsidy scheme – ‘JobKeeper’-that allowed businesses to keep staff on their payrolls even though they worked zero hours.
With the government support soon expected to be withdrawn, economists expect the jobless rates to remain elevated for some time.
In New Zealand, economists fear deflation because falling prices lead to lower consumer spending, which is a big part of economic growth. Companies respond to falling prices by slowing down their production, which leads to layoffs and salary reductions.
From the Reserve Bank’s (RBNZ) perspective, it’s not inflation pressures today, but inflation pressures over 2021 that the Reserve Bank will be most concerned about – as inflation is a lagging economic variable, ASB Bank said.
“Deflation risks cannot be ruled out, which will make the RBNZ nervous given the limited effectiveness of the OCR, which is now stuck at its operational lower bound,” ASB economists said in a commentary.
“For now, it appears the economy has recovered from lockdown faster than expected.”
The key is how well activity and confidence hold up over the rest of the year as the labor market weakens, sending unemployment higher and weighing on wage growth.