Unemployment on the Rise
Unemployment is set to hit its highest level in nearly nine years, as the lagging effects of last year’s recession and the sluggish recovery hit hiring and wages. Economists expect the rate to rise to 5.3 percent at the end of June – the highest since the end of 2016 – and up from 5.1 percent in the previous quarter, with jobs having been shed and hiring almost at a standstill.
Labour Market Performance
The labour market is lagging behind the economic performance, reflecting last year’s recession. As many as 40,000 jobs may have been shed in the past couple of years, say economists. Annual wage growth is seen to be just above 2 percent, which is tough on household budgets but eases inflation pressures. The economy may have shed as many as 40,000 jobs in the past couple of years, which is a significant blow to the labour market.
Factors Contributing to Unemployment
Economists believe that the labour market was close to the bottom, but the lack of meaningful growth in the past quarter has cast doubt on whether this might be the case. A degree of "labour hoarding" had suppressed unemployment as firms opted to hold on to staff in anticipation of an economic upturn. However, if a recovery in economic momentum doesn’t do the heavy lifting when it comes to ‘right-sizing’ firms’ labour input, a further reduction in headcount may be needed.
Impact on Young People
Chief among the casualties of the downturn and job losses have been young people. As the economy cooled off, this group has found themselves out of work again or are struggling to get into work in the first place. The overall slide in immigration from post-Covid gains of more than 130,000 a year to a mere 15,000, and a subsequent exodus to Australia, are likely to be marginal influences for the labour market.
Wage Growth and Inflation
Expectations are that private sector labour costs grew about 2.3 percent in the June quarter – a four-year low – as the weaker employment market shifted the bargaining advantage to employers from workers. That would mean wages falling behind rising inflation, but would also reduce wage pressures on domestic prices. Wage inflation can be considered broadly consistent with CPI inflation around target, but given we’re a decent clip from the labour market entering inflationary territory… it’s fair to say that disinflation pressures stemming from the labour market are set to continue for a while yet.
Future Outlook
Conditions are right for another Reserve Bank interest rate cut on 20 August. Downside risks to medium-term inflation are growing given the soft labour market and dimming global outlook. Economists expect the RBNZ to cut the cash rate by 25bps (basis points) at the August meeting. And they’ll need to go to 2.5 percent eventually.
Conclusion
In conclusion, the labour market is facing significant challenges, with unemployment set to rise to its highest level in nearly nine years. The lack of meaningful growth in the past quarter has cast doubt on whether the labour market is close to the bottom. The impact on young people has been significant, and wage growth is expected to be low, which will reduce wage pressures on domestic prices. The future outlook is uncertain, but conditions are right for another Reserve Bank interest rate cut.
