Economy

We are still heading towards a zero percent OCR

Bernard Hickey says the Reserve Bank is still expected to cut the Official Cash Rate next week and again in February - and the way things are looking we are still headed for a zero percent OCR by this time next year.

Labour market data out yesterday showed a rise in unemployment to 4.2 percent and a slowdown in jobs growth to 0.2 percent for the September quarter, with just 0.9 percent jobs growth for the year.

Pleasing the hawks, overall wage growth rose to a 10-year high of 2.4 percent in September, largely because of collective agreements for pay hikes for nurses, teachers and police officers.

But the doves pointed out that without those big public sector deals, wage growth remained an anaemic 1.8 percent.

Given the way the labour market lags the rest of the economy, most economists and those in the financial markets still expect the Reserve Bank to cut the Official Cash Rate by 25 basis points next Wednesday and by another 25 basis points to 0.5 percent in February.

My view is there is still plenty of labour capacity left in the economy with 295,000 people saying they want a job or more work, and with the app economy encroaching into the previously domesticated services industries.

This effectively 'invents' new labour capacity out of thin air for New Zealand, either from overseas or literally out of the 'thin air' of algorithms using big data and AI in the cloud to do things people and local companies used to do.

The under-utilisation rate remains above where it was in 2007 (see chart below), and that was before the invention of the iPhone and the wide-spread rollout of cheap 4G networks and the Chorus fibre broadband network to homes. The arrival of 5G from next month when Vodafone rolls out its network in the big cities will only accelerate the 'app-ification' of the economy, which is in effect a supply-side shock to the inflation outlook. Find out a lot on that from my piece this week on how 5G could unleash a productivity surge.

My bet is we are still headed for a zero percent OCR by this time next year with growth talk about how to do Quantitative Easing in a way that does not just push up house prices, stock prices and bond prices to ever more unaffordable highs for those currently without any of those assets.

There is a growing debate overseas about 'Direct Action', which involves the Reserve Bank printing money and putting it directly into the hands of either the public or the Government to spend. Here's a summary from the world's largest fund manager, Blackrock, which has been arguing for months for such a move globally.

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