Labour market data out tomorrow would be one of the most important releases in the calendar ahead of the Reserve Bank's March monetary policy statement, Westpac economist Anne Boniface said yesterday.
Very low inflation had already put the Reserve Bank on high alert and labour market indicators - both the unemployment rate and wage growth - were important signals of how much spare capacity was in the domestic economy.
The more spare capacity in the economy, the less pressure there was on firms to raise prices.
"This will sound a warning bell for the Reserve Bank which is relying on rising non-tradeable inflation to help push the consumers price index [inflation] back into its 1% to 3% target band.''
With market expectations for a March official rate cut balanced on a knife edge, a weaker-than-expected labour market result could go a long way to convince markets a rate cut would come sooner rather than later.
It would also support Westpac's call for a March rate cut, she said.
Westpac was expecting the household labour force survey to show a rebound in employment growth in the December quarter and was forecasting a 0.9% quarterly lift in employment.
While still a solid quarterly gain, the slower growth in the economy through the middle part of last year was evident in the annual data, Ms Boniface said.
Annual employment growth was expected to be just 1.3% - the slowest pace since mid-2013.
In the past year, an important backdrop to developments in the labour market, and the New Zealand economy, had been surging population growth on the back of a big lift in net immigration.
Add high participation rates to the mix and growth in the labour market has continued to outpace employment growth, pushing the unemployment rate higher.
"This quarter, once we take into account a rebound in labour force participation after a surprisingly sharp fall in September, we're forecasting the unemployment rate to rise to 6.1%. This will be the fifth quarter in a row the unemployment rate has risen.''
Many of the underlying drivers of key headline measures, such as unemployment rate, could be volatile, she said.
One reason to expect such a strong lift in employment growth in December was because the fall in both employment and participation in the September quarter was surprisingly large.
The quarterly employment survey was expected to corroborate the same broad themes of the labour force survey - a modest increase in the pace of jobs growth in the final quarter of the year and subdued wage inflation.
The number of full-time equivalent employees was expected to have grown 0.9% in the quarter, up from 0.7% in September.
A key theme permeating labour market data over the past year had been subdued wage inflation, Ms Boniface said.
The gradual lift in the unemployment rate, combined with near-zero inflation, had left workers with little leverage when it came to annual wage negotiations.
Annual growth of 1.5% was expected in the labour cost index, down from the 1.7% reported a year earlier.
The broader quarterly survey measure of average hourly earnings growth was expected to be up 2.6% on a year ago, she said.
"While wage growth has been subdued, workers have benefited from low inflation keeping a lid on prices. Most noticeably, falling petrol prices on the back of plummeting international oil prices have certainly helped workers' pay cheques stretch a little further.''
However, despite low inflation, rising unemployment and weak wage growth were likely to be a barrier to further growth in consumer spending this year, Ms Boniface said.
At a glance
• Labour market data released tomorrow
• Fourth-quarter employment growth of 0.9% expected
• Unemployment rate to remain steady at 6.1%
• Wage growth remains subdued
