The Materiality of Nature-Related Financial Risks to the UK

Economic

Summary:

The urgency around assessing nature-related financial risks.

At least half of global GDP is moderately or highly directly dependent on nature, and ultimately there is no economy without its critical services, including clean and abundant water, clean air and food.

Nature across most of the globe has now been significantly altered by multiple human drivers, such as land-use change, pollution, extraction of minerals, abstraction of water and climate change. Statistics on the current state of biodiversity loss and environmental degradation are alarming: the extent and condition of ecosystems has declined in 50 per cent of natural ecosystems, including more than 85 per cent of wetland area lost, and 25 per cent of species are at risk of extinction.

The 2019 Global Assessment Report of the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES) further concluded that 14 of the 18 ecosystem services that were assessed had declined since the 1970s. The United Kingdom is no exception. The percentage of UK habitats ‘in favourable or improving conservation status’ has been deteriorating since 2007, exacerbating impacts on its soils, pollinators, air and environmental pollution, water and flood protection. 75 per cent of the United Kingdom is covered by at least one hotspot of natural capital depletion, and 25 per cent is covered by two or more hotspots of natural capital depletion.

The United Kingdom, with its globally interconnected economy, is also exposed to significant global emerging risks.

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UBS

Economic

Understanding company financial reports and calculating stock valuations, together with fundamental analysis of industries, companies, technologies and business models, are some of the requisites in security selection for portfolio management.

At first glance, these disciplines appear to be entirely mathematical and rules-based; surely the most consistent and accurate application of logic should deliver the best estimates of relative value between stocks and result in the optimal portfolio, shouldn’t it?

Not quite. This description is narrow, and oversimplifies the task. While history may teach us valuable lessons about the future, it is not an accurate sextant by which to navigate a course.

The “science” of investment also has a soft side, an “art” or “fuzzy logic” sometimes attributed to “gut feeling”, which requires a rather different skill set. Creative thinking and an understanding of human psychology to understand why people behave how they do in the real world and to evaluate every possible scenario and its implications to the investor is also needed. Understanding both sides – the maths and the art – and their symbiotic relationship, is a craft.

Imagine every possible eventuality

Inside every forecast for a business and the valuation of its equity are a multifarious range of estimates and assumptions about the future. How far can a company grow, how much market share can they take, how much room is there for a business to improve its operating efficiency and capital structure? To what extent does a company enjoy economies of scope and scale? Does it have pricing power and power over its suppliers?

Working out all the possible opportunities for a business to grow together with potential hurdles requires imagination. Anticipating disruptive changes in technology, shifts in competitive landscape and regulations, and understanding the nature of systemic risks as well as company specific risks takes creativity and a deep understanding of industries, technologies, business models and strategies.

Combining hard logic skills with the creativity required to produce a balanced estimate of future returns, and then constructing a balanced portfolio with enough diversification to avoid volatility spikes, yet with enough conviction holdings to deliver above market long-term returns, that is the real craft of long-term thematic investing.

Defying EMH

The efficient market hypothesis (“EMH”) states that asset prices reflect all publicly available information and, since this process is dynamic, constant and immediate, it should not be possible to profit from information-based investment decisions.

This hypothesis may be true to an extent, and it fits well with the idea that investment is logical, scientific and maths-based. However, there are a number of holes in the theory. For example, there are approximately 50,000 listed equity securities on global stock exchanges1. The portfolio manager, however much endowed with sharp analytical skills, who attempts to analyse this many stocks, faces an impossibly large task and is likely to come unstuck due to lack of time to build any depth of knowledge in any stock, or simply from overwork, or both. As we know, a little knowledge can be a dangerous thing.

We would rather know a lot about a few stocks, rather than little about many. Narrowing the investment universe into a smaller subset of stocks therefore – particularly stocks that share similar traits, such as industry, technology, business model or theme – allows more time for in-depth analysis and considered judgement. By extension, if the lens is focused far enough, it may allow the portfolio manager, assisted by experts from industry and academia, to become a subject-matter expert.

A “pure-play” approach2 to thematic investing therefore not only produces portfolios with high exposure to favoured themes, but also concentrates the investment universe down to a size which allows for such an information advantage.

Specialist knowledge

A simple example of the importance of industry and technology expertise, is the ability to understand context and jargon. So much information is so heavily codified that important news headlines in the world of biotech, semiconductors, enterprise software, and many other industries, requires significant sector-specific insight to understand. News which represents fall-off-your-seat, shocking and valuable investment information to some market participants, might not even register as significant to others.

Therefore, even if the EMH is correct in its assertion that all information is available to all investors at the same time, it is undeniable that some investors are likely to be better placed than others to understand the significance of the information. By analogy, a daily train commuter is likely to be able to react to delays and service disruptions more quickly and efficiently than a tourist riding the train and visiting the country for the first time.

Our team has a wealth of experience of investing into their designated theme. They are also supported in their analysis and understanding of the technology and industry-specific dynamics by an "Advisory Board" selected from industry and academia.

Rational expectations

Neoclassical economic theory shares some common traits with the efficient market hypothesis, at least in its assumption of uniform and rational behaviour. Specifically, it assumes people have well defined preferences based on price and scarcity, and make well-informed, self-interested decisions based on these preferences.

The trouble with this is that people often behave irrationally. They break the model. They are drawn to high prices thanks to the implicit perception of quality. They make purchases based on nostalgia, the need to attain status, or simply to be different.

A quote attributed to David Ogilvy CBE, founder of Ogilvy & Mather and often described as the father of advertising, sums up the problem of trying to rationalise human behaviour: “Consumers don't think how they feel, they don't say what they think, and they don't do what they say."

If our underlying motivations for doing something are different to what we tell people and perhaps even different to what we tell ourselves, then this might explain why so many apparently economically rationale theories do not work in the real world. If economics is itself a soft science, in the sense that it is a study of human behaviour, then perhaps more of the task of fundamental analysis and stock selection is art rather than science. Put another way, and to quote Ogilvy’s colleague Rory Sutherland, “The fatal issue with logic is that it always gets you to exactly the same place as your competitors.”

Creative thinking

On the surface, investment analysis appears cold, logical, mathematical and precise, as many of us perceive economics to be. But under the surface the process is more complex, nuanced and requires creativity, imagination, and in-depth knowledge. This soft science of analysis, prediction, and valuation is a real craft.

In a world of logic-based conformity, quantitative data analysis, and a growing choice of AI-enabled stock selection tools, the softer, creative side of security analysis may prove to be the differentiating factor in alpha generation and the discovery of idiosyncratic value.

To stay updated on all economic events of today, please check out our Economic calendar

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Glendon

Economic

The stock market is a crucial component of the global economy, offering a platform where individuals and institutions buy and sell ownership stakes in companies. To the casual observer, it may seem chaotic, with numbers and prices constantly shifting. However, the stock market operates on a set of rules and principles that make it both organized and predictable to a certain degree. Understanding how it functions helps investors make informed decisions, assess risk, and recognize opportunities for potential returns.

What Is the Stock Market?

At its core, the stock market is a network of exchanges where stocks (or shares) of publicly traded companies are bought and sold. Shares represent fractional ownership in a company, and when you buy a share, you essentially purchase a small part of that company. Some of the world’s largest stock exchanges include:

New York Stock Exchange (NYSE):Known as the largest stock exchange by market capitalization, where well-established companies list their stocks.

NASDAQ:Home to many technology giants like Apple, Amazon, and Microsoft.

London Stock Exchange (LSE)

Tokyo Stock Exchange (TSE)

Each exchange operates as a marketplace where stocks of various companies are listed, and investors can buy or sell shares of those companies.

Why Do Companies Go Public?

When a company wants to raise capital to fund growth or reduce debt, it may choose to go public by offering shares through an Initial Public Offering (IPO). By issuing shares, companies receive an influx of cash from investors in exchange for ownership. Public listing brings in funds that companies can use for expansion, research, development, or other projects, while also allowing shareholders to buy, sell, or trade their shares.

Key Players in the Stock Market

Individual Investors:Everyday people who buy and sell stocks, either directly or through retirement accounts and mutual funds.

Institutional Investors:Organizations such as pension funds, mutual funds, and hedge funds that buy stocks in large volumes.

Market Makers:Financial institutions or firms that facilitate trading by buying and selling stocks, helping maintain liquidity.

Regulatory Bodies:Organizations like the U.S. Securities and Exchange Commission (SEC) that oversee trading to ensure it is fair and transparent.

How Are Stock Prices Determined?

Stock prices fluctuate based on supply and demand. If more people want to buy a stock than sell it, its price will rise. Conversely, if more people want to sell than buy, the price falls. This dynamic reflects the perceived value and potential of a company based on various factors, including:

Company Performance:Revenue, profit, and growth rate are primary indicators of a company’s value. A company that performs well will typically see its stock price rise as investors anticipate higher returns.

Economic Conditions:Interest rates, inflation, and GDP growth can influence investor sentiment. For instance, lower interest rates make borrowing cheaper, which often boosts stock prices.

Market Sentiment:Investor perception or overall market mood also plays a role in stock prices. News events, technological advancements, and even global events like pandemics can lead to drastic shifts in market sentiment.

Earnings Reports and Financial Statements:Quarterly earnings reports provide insights into a company’s performance and growth prospects, impacting stock prices.

How Stocks Are Traded

Most stock trades occur on exchanges, though some are conducted off-exchange in over-the-counter (OTC) markets. Trading can be conducted electronically, often facilitated by brokers or trading platforms.

Bid and Ask Prices:In the stock market, the "bid" price is the maximum amount a buyer is willing to pay, while the "ask" price is the minimum a seller is willing to accept. The difference is known as the "spread."

Market Orders:A market order allows an investor to buy or sell a stock immediately at the current market price.

Limit Orders:A limit order sets a specific price at which a trader is willing to buy or sell, providing more control over trade execution.

Stock Indices:Indices like the S&P 500 or the Dow Jones Industrial Average track the performance of groups of stocks, providing a snapshot of market health.

The Role of Technology in the Stock Market

Technology has revolutionized stock trading, making it accessible to individuals worldwide. Automated trading systems and algorithms now account for a significant portion of trades, with trades often executed in fractions of a second. Online trading platforms allow users to monitor prices, access research, and execute trades seamlessly, expanding accessibility to all types of investors.

Key Data: Stock Market Returns and Volatility

Historical Returns:Over the long term, stocks have offered an average annual return of about 7-10% after inflation.

Market Volatility:While stocks offer potential for returns, they are also volatile, especially in the short term. For example, during the 2008 financial crisis, the S&P 500 fell by nearly 40%, only to rebound in the years that followed.

Conclusion: The Stock Market’s Role in Wealth-Building

The stock market plays a pivotal role in wealth-building and the overall economy, enabling companies to raise capital and investors to grow their wealth. For individuals, investing in stocks can be a valuable tool for building wealth over time. However, it’s essential to approach the stock market with a clear understanding of its mechanics, risks, and long-term potential. By learning how the stock market works, investors can make informed decisions and navigate its complexities with greater confidence.

To stay updated on all economic events of today, please check out our Economic calendar

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Glendon

In the realm of global finance, few relationships are as consequential as that between China and the United States when it comes to debt. A key component of this relationship is China's significant role in purchasing U.S. Treasury bonds. These bonds are a form of debt issued by the U.S. government to raise funds for various expenditures, and China is one of the largest foreign holders of U.S. Treasury securities. As of recent data, China holds over $1 trillion in U.S. debt, making up about 15% of the foreign-owned Treasury bonds. But why does China, a global economic powerhouse, continue to buy U.S. debt? The reasons are multifaceted, blending economic benefits with strategic considerations.

The Basics of U.S. Treasury Bonds

U.S. Treasury bonds are government-issued debt securities used to finance the national budget, including military spending, social programs, and infrastructure projects. These bonds are seen as a safe, low-risk investment because they are backed by the full faith and credit of the U.S. government. They are sold in various maturities, ranging from short-term bills to long-term bonds.

For foreign governments and institutional investors, Treasury bonds offer a stable and secure way to park large sums of capital. The bonds are liquid, meaning they can be easily bought and sold, and they offer a predictable stream of interest payments, making them an attractive investment.

1. Currency Reserves and Exchange Rate Management

One of the primary reasons China buys U.S. Treasury bonds is to maintain its currency reserves. The Chinese government holds vast amounts of U.S. dollars, primarily through its trade surplus with the U.S., which results in an influx of dollars from exports. Rather than letting these dollars sit idle, China invests a significant portion of them in U.S. Treasury bonds. This helps China manage its foreign exchange reserves, which, in turn, allows the country to stabilize its own currency, the yuan.

By holding U.S. debt, China effectively keeps the value of the yuan lower relative to the dollar, benefiting Chinese exporters. A weaker yuan makes Chinese goods more affordable on the global market, which boosts exports and supports the country's growth strategy. This is part of a broader policy of managed exchange rate controls, which gives China a competitive advantage in international trade.

2. Diversification of Reserves

China’s holdings of U.S. Treasury bonds also serve as a way to diversify its foreign exchange reserves. With over $3 trillion in foreign reserves, China seeks to mitigate risk by holding a broad range of assets, including Treasury bonds. While U.S. debt is low-risk, it is also an important part of a diversified investment strategy.

Diversification helps China manage risk by balancing its portfolio with assets that can perform well under different economic conditions. While U.S. Treasury bonds may not yield high returns, they are highly liquid and provide a safe haven in times of global economic uncertainty, making them a reliable anchor in China’s portfolio.

3. U.S. Dollar Dependency

The global financial system is heavily dependent on the U.S. dollar, which is the world’s primary reserve currency. China’s decision to buy U.S. Treasury bonds is tied to its need to hold large quantities of dollars. These dollars are essential for international trade, especially since a significant amount of global trade is conducted in U.S. dollars.

For China, maintaining a substantial dollar reserve ensures that it can continue to engage in global trade, secure foreign investments, and stabilize its own economy. The U.S. dollar's dominance in global finance means that holding Treasury bonds is an effective way for China to participate in the global financial system and support its own currency stability.

4. Political Leverage and Economic Ties

China’s investment in U.S. Treasury bonds also reflects the political and economic ties between the two nations. The bond market is a crucial area where China and the U.S. are interconnected. By purchasing U.S. debt, China helps finance American government spending, which is crucial for the U.S. economy.

Additionally, by holding such a large amount of U.S. debt, China gains some degree of economic leverage. While it has the power to influence U.S. interest rates through its holdings, China has generally avoided selling off large amounts of Treasury bonds, as it would cause significant disruption to both U.S. and global markets. This delicate balance of interdependence underscores the importance of U.S.-China relations in the global financial landscape.

5. Attractive Yields on U.S. Debt

Although the yields on U.S. Treasury bonds are relatively low compared to riskier investments, they are still attractive given their stability. For a country like China, which is seeking safe investment opportunities for its massive reserves, the returns on Treasury bonds—although modest—are predictable and secure. This makes them an appealing investment option, even when the yields are lower than those of other potential investments.

6. Global Confidence in U.S. Debt

The United States' reputation as an economic and financial powerhouse also plays a key role in China’s decision to buy Treasury bonds. The U.S. government’s ability to repay debt is widely regarded as highly reliable. This confidence in the U.S. economy and its financial system reassures investors like China that holding U.S. Treasury bonds is a low-risk endeavor.

In a world where global economic instability is a constant concern, the U.S. dollar remains the currency of choice for central banks and investors worldwide. The U.S. government’s ability to service its debt—combined with the liquidity and depth of the U.S. Treasury market—ensures that it remains an attractive destination for foreign investment, especially for countries like China with vast reserves to manage.

Conclusion: The Symbiotic Relationship

China’s decision to buy U.S. Treasury bonds is driven by a combination of economic strategies and global financial practices. The purchase of U.S. debt provides China with the tools to manage its currency, stabilize its economy, and maintain its position in the global market. At the same time, it fosters a deep economic interdependence between the two countries, one that impacts not just China and the U.S., but the entire global economy. By holding large amounts of U.S. debt, China is both securing its financial future and playing a crucial role in the stability of the global financial system.

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Glendon

Economic

Founded in Singapore, Fitness Champs Holdings has become a dominant force in the local swim lesson industry, providing a range of water-related educational services. The company's mission is simple: to teach people of all ages how to swim and ensure they are safe in aquatic environments. Fitness Champs offers structured, tiered lessons to cater to different age groups and skill levels, making it a versatile option for families looking to introduce their children to swimming or for adults seeking to improve their swimming technique.

In addition to private and group lessons, the company also offers water safety training, which has become a critical service as more people seek ways to ensure their children’s safety around water. The focus on safety has made Fitness Champs a trusted brand in Singapore, and now, with its IPO, the company is looking to expand beyond its local market to other regions in Asia and potentially globally.

Key Details of the FCHL IPO

Fitness Champs Holdings is aiming to raise significant capital with its IPO, which will be listed on the NASDAQ. The company plans to offer 1.5 million shares at a price range of $4.00 to $5.00 per share. This offering is set to generate between $6 million and $7.5 million in proceeds, which will primarily be used to fund expansion plans, increase brand awareness, and support the development of additional services.

The company’s ticker symbol on the NASDAQ will be FCHL, and its IPO launch is contingent on receiving approval for listing. The IPO date has not been officially set yet, but it is anticipated that the offering will hit the public markets in the coming months, making this a key opportunity for investors interested in the wellness and education sectors.

The Fitness and Wellness Market: A Growing Opportunity

Fitness Champs’ IPO comes at a time when the global wellness market is experiencing significant growth. As of 2024, the wellness industry is projected to surpass $4.4 trillion globally, driven by increasing awareness around health, fitness, and safety. Swimming, as a life skill and fitness activity, is an integral part of this trend. In many parts of the world, particularly in urban areas, swim lessons have become essential for children, with parents recognizing the value of water safety education.

Fitness Champs is well-positioned to capitalize on this trend, as its business model is grounded in providing high-quality, accessible swim lessons that cater to a diverse customer base. The company's expansion plans include not only expanding to other countries but also diversifying its offerings to include more specialized water-related services such as competitive swim training, aqua fitness, and more.

Growth Strategy Post-IPO

The funds raised from the IPO will play a critical role in Fitness Champs’ growth strategy. Key areas of focus include:

Geographic Expansion: Fitness Champs aims to establish new locations beyond Singapore, with a focus on neighboring Southeast Asian markets. The company’s efficient and scalable model makes it well-suited for expansion into these regions.

Brand Building: Fitness Champs plans to invest in marketing and advertising campaigns to strengthen its brand recognition, both in Singapore and internationally. These efforts will help increase customer awareness and attract new clients.

Service Diversification: To maintain its competitive edge, Fitness Champs plans to diversify its services, adding new aquatic-related courses that cater to different demographics. This could include specialized services for elderly clients, aqua therapy, and fitness training for adults.

Technology Integration: As digital tools become more prevalent in the fitness industry, Fitness Champs is exploring ways to incorporate online booking systems, virtual lessons, and apps that can help parents track their child’s progress. These innovations will add value to the company’s offerings and improve the customer experience.

The Competitive Edge: What Sets Fitness Champs Apart?

Fitness Champs stands out in a crowded market by offering more than just swim lessons. The company is deeply committed to ensuring water safety, with each of its instructors rigorously trained and certified. This emphasis on safety has earned Fitness Champs a solid reputation in Singapore, making it a go-to choice for parents who prioritize their children’s well-being in aquatic settings.

Moreover, the company’s focus on creating an inclusive environment, with lessons for both young children and adults, positions it uniquely in the wellness sector. This broad approach allows Fitness Champs to appeal to a diverse customer base, ranging from parents looking for early childhood swim lessons to adults seeking fitness and rehabilitation through swimming.

Potential Risks and Considerations

As with any IPO, there are risks that investors should consider before jumping in:

Market Competition: While Fitness Champs is a leader in the Singaporean swim lesson market, it faces competition from other local and regional players. It will need to maintain its reputation for quality and customer satisfaction to stay ahead.

Expansion Risks: Expanding into new regions poses logistical and operational challenges. Fitness Champs will need to carefully evaluate new markets to ensure that its business model is adaptable and can thrive outside Singapore.

Economic Sensitivity: The wellness industry can be affected by economic downturns, which may lead to fewer families prioritizing swim lessons. Fitness Champs will need to adapt to changing economic conditions to remain resilient.

Conclusion: Is FCHL’s IPO Worth Watching?

Fitness Champs Holdings Limited’s IPO is a significant event for the company and the broader wellness market. With a proven business model, strong brand recognition, and an expanding market for health and wellness services, Fitness Champs is well-positioned to capitalize on the growing demand for swim lessons and water safety education. The company’s IPO offers a unique opportunity for investors to engage with a business that is not only poised for growth but also actively contributing to global health and safety.

Investors should closely monitor the upcoming FCHL IPO, as it could signal the beginning of a new chapter in the global wellness industry.

Conclusion

Fitness Champs Holdings Ltd.’s IPO marks a pivotal moment in its journey as a leader in swim education. As the company continues to scale and diversify, the IPO offers investors the chance to ride the wave of growth in the wellness and education sectors.

To stay updated on all economic events of today, please check out our Economic calendar

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JanusHenderson

Economic

My colleague Mike McNurney and I were recently reminiscing about some of our favorite artificial intelligence (AI) stories and movies from the past.

From books like “I, Robot” and “Do Androids dream of Electric Sheep?” to movies like “2001: A Space Odyssey” with HAL 9000 or “Tron” and the Master Control Program, humans as well as sci-fi nerds like me and Mike have thought about the promise and possibilities AI could offer for decades. In fact, Mike has written about AI quite a bit this year and created a great presentation on the subject to help advisors and clients better understand the implications of these technologies.

Many of these works of fiction have a decidedly doomsday perspective, but in the real world, I think we have reached a point where advisors need to consider how they want to use AI in their practices and, more importantly, understand how clients will be affected by it.

One reason this is worth considering is the level of personalization clients are seeking in their interactions with financial advisors (FAs). In a recent survey, 96% of FAs acknowledged that personalization is important, if not very important, to the success of their practice.

Making personalization scalable

We all seek personalization with any service provider or business we interact with. The question is, how much personalization can businesses or FAs provide while keeping it scalable? Ideally, every interaction would be personalized to each individual, but that’s clearly not sustainable. Heck, I’ve been guilty of trying to do this in my own interactions, and I must admit it can be very difficult and time consuming.

And the research bears this out: In the same study, 54% of FAs also said they found it challenging to spend as much time with each client as they would like, which led to 68% saying they found personalization difficult to scale within their practice.

This is where AI may be able to provide some assistance. Advisors are using AI more and more, and firms are spending more time, effort, and money working to test and provide tools that can be easily used by FAs.

In fact, Orion recently found the following regarding AI usage by advisors or their firms:

– 46% plan to leverage AI for the strategic direction of the firm in the next three years;

– 42% are currently evaluating/testing AI;

– 32% are already using AI.

While AI is clearly making inroads in the financial services industry, I think it’s important to consider how clients or potential clients might feel about their advisor using AI.

We addressed this question in our most recent Investor Survey, where we asked 1,000 participants several questions around how they would feel if they learned their advisor was using AI to complete certain tasks.

Those tasks included:

– Automatically responding to texts or emails;

– Providing investment recommendations;

– Handling administrative tasks;

– Creating educational content.

For each of these tasks, participants could gauge their comfort level as Upset, Neutral, or Good. The responses we received provide insight into what investors want from advisors, how they view relationships and communication, and what they believe is included in an advisor’s value proposition.

To stay updated on all economic events of today, please check out our Economic calendar

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Westpac

Economic

Unemployment rate: 4.8% (prev: 4.6%, Westpac f/c: 5.0%, RBNZ f/c 5.0%)

Employment change (quarterly): -0.5% (prev: +0.2%, Westpac f/c: -0.6%, RBNZ f/c -0.4%)

Labour costs (private sector, quarterly): +0.6% (prev: +0.9%, Westpac f/c: +0.7%, RBNZ f/c +0.7%)

Average hourly earnings (private sector, ordinary time quarterly): +1.1% (prev: +1.4%)

New Zealand’s labour market continues to soften, in line with the shallow drawn-out recession we have been experiencing over the last couple of years. The unemployment rate rose from 4.6% to 4.8% in the September quarter, the highest level since December 2020.

This was a smaller rise than we and the Reserve Bank had been expecting, with the miss being entirely due to a sharper than expected fall in the labour force participation rate. This reflects an ongoing unwind of the pressures that had built up in the labour market in previous years.

The number of people employed fell by 0.5%, roughly in line with what the Monthly Employment Indicator (MEI) had signalled. In fact, the various employment measures were unusually in agreement this time, with the Quarterly Employment Survey (QES) also showing a 0.3% fall in filled jobs and full-time equivalent employees.

While these job losses did lead to a rise in unemployment, there was also a large number of people who exited the labour force altogether. The participation rate fell from 71.7% to 71.2% in the September quarter, its lowest level in over two years – we had assumed a fall to 71.4% in our forecast.

The fall in participation appears to have been strongly concentrated among young people (15-24 years old). In the initial post-Covid period, the economy was running hot and the border closure meant that migrant workers weren’t available. In this time, many young people were drawn into the labour force to fill the gap – often at the expense of study. As the economy has slowed and migration has rebounded, this group has been at the forefront of job losses. While this has led to a rise in the number of unemployed, we’re also increasingly seeing young people return to or remain in study, ending their job search altogether. Indeed, the NEET ratio (young people not in employment, education or training) has actually fallen over the last few quarters.

Turning to wages, the Labour Cost Index (LCI) rose by 0.6% for the quarter, slightly lower than the 0.7% that we and the RBNZ expected. Public sector wages were up by 0.9%, boosted by a pay increase for police, but this didn’t have an impact on the overall results. The unadjusted analytical LCI (which doesn’t exclude pay increases that are related to productivity) rose by 0.9%, the smallest quarterly increase since March 2021.

So what does this mean for the RBNZ? We think not much – it simply highlights the degree of flex that there is in the labour force as economic conditions change. The bottom line is still that employers are shedding workers, and wage pressures are easing accordingly. That’s consistent with the view that inflation pressures are being reined in and that monetary policy no longer needs to be as restrictive. But we don’t think that there’s anything in the figures that would shift the RBNZ’s thinking for its next policy decision at the end of this month.

To stay updated on all economic events of today, please check out our Economic calendar

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