Last week was a massive one for New Zealand economic news. The US-China trade war entered a troubling new phase, the local jobs market defied expectations of a slowdown, and the Reserve Bank delivered a surprisingly large interest rate cut.

The week kicked off with China retaliating to the latest US tariff move in a range of ways, including a devaluation of its currency. It is becoming clearer that the trade wars are going to impact Chinese demand for New Zealand products. We were not surprised, then, to see a decline in dairy prices in last week's GlobalDairyTrade auction. We have now reduced our forecast of this season's farmgate milk price payment to $6.70/kg milk solids, on the expectation that Chinese demand for milk will falter. At the start of the year our forecast was $7.20/kg, so we've gone from expecting a strong dairy season to an average one. The other key area of fallout is going to be export log prices, which already fell 25% in June. We anticipate further price decline given what is happening in China.

The second key development was a surprise drop in the unemployment rate to an eleven-year low of 3.9%. That's tight, but not extreme by New Zealand standards – unemployment got into the low 3s in the mid-2000s. This was no data aberration – Stats NZ's suite of labour market indicators was strong almost across the board. Employment growth was a healthy 0.8% according to the Household Labour Force Survey, and the Quarterly Employment Survey (QES) was similarly robust.

Wage growth clearly accelerated on all measures, with the Labour Cost Index registering 0.7% quarterly and 2.1% annual growth, the fastest since the GFC. Much of that was a product of the 7.3% increase in the minimum wage, but not all. We are finally seeing signs that wage inflation more generally is warming, albeit gradually.

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