Although today’s labour market release made sense – it didn’t stop it being negative.
We saw the unemployment rate rise – which was statistic payback for the decline in December, that was due to a drop in the participation rate, which was due to a bunch of seasonal hiring not occurring in the December quarter and as a result those potential employees not entering the labour market 😛
Furthermore we saw hours worked remain weak. This is consistent with the mix of a high exchange rate and low growth in output – with the dollar reducing the relative price of capital to labour.
All very exciting. So what should we do. Do we need to “get the exchange rate down”, “increase fiscal spending”, “print money”.
Well, I’d go back to the traditional economic view and ask “is the interest rate appropriate”. Recent data is suggesting, in combination with moves overseas, that the official cash rate should be cut. This is not an example of policy failure – it just shows us how exposed and vulnerable New Zealand is to the financial volatility overseas.
Sadly, as a small open economy this is just the way things are – and the best way we can deal with it is to have an inflation targeting central bank, a floating exchange rate, and a government that is willing to run countercyclical fiscal policy (so targets a balanced budget when they forecast the economy will be back at “potential”). We have all these things, which has really helped us in recent years.