Job market cools, unemployment expected to rise further: economists

ASB senior economist Mark Smith said the balance of power was tilting further towards employers as labour costs grew and the jobs market cooled.
photo: Royal Bank of New Zealand

The unemployment rate is expected to rise to its highest level in nearly four years as demand for workers cools and the economy struggles under the weight of high interest rates.

Economists expect data on Wednesday to show the unemployment rate rose to 4.7% in the June quarter, up from 4.3% in March and the highest level since late 2020.

Westpac senior economist Michael Gordon said there was “clear softening” in the labour market, which was what the Reserve Bank of New Zealand (RBNZ) wanted to see.

“The rise in unemployment from its lows was slow at first but has accelerated in recent quarters,” he said.

The labor shortages experienced by employers in recent years appear to be a thing of the past.

“This is due to a large influx of migrant workers filling vacancies following the reopening of the border, and a cooling economy leading to a drop in demand for new workers,” Gordon said.

“Job advertisements are currently below pre-COVID levels, businesses are reporting that labour is no longer difficult to find, and our employment confidence index suggests households are finding it more difficult to find work,” he said.

Wage inflation is also expected to cool further as demand for workers slows and competition for jobs intensifies.

ASB senior economist Mark Smith said private sector wages were likely to rise 0.8 per cent this quarter, with annual cost growth set to fall to 3.5 per cent – the slowest rate since mid-2022.

“Labour cost growth is expected to cool as the balance of power tilts increasingly towards employers and as cost of living increases slow,” he said.

Smith said a modest increase in the minimum wage would also help slow wage inflation and moderate cost of living increases.

“In our view (and that of the RBNZ), the labour market is the key driver of the inflation process. We are increasingly confident that current conditions will keep inflation persistently below 3 per cent,” he said.

ASB expects the official cash rate (OCR) to be cut by 50 basis points by the end of the year – initially by 25 basis points in October and again in November.

Most economists expect the OCR to be cut by at least 25 basis points by the end of 2024.