The Recession Continues…With A Triple Trough

Double-take! The Kiwi labour market is even weaker than the headline suggests. The devil is in the detail. Worker demand has waned, and unemployment is drifting higher.

* The unemployment rate rose to just 4.8% from 4.6%, slightly better than we and the market consensus had predicted. But it’s a result of a much sharper decline in labour force participation, from 71.7% to 71.2%. That in itself is a sign of a weak jobs market. Workers are now heading (or are forced) for the exits as demand wanes. As StatsNZ comments “From the survey, some of the largest increases in those not in the labour force over the year came from people mainly engaged in leisure activities, studying or training, and taking care of themselves due to their own sickness, illness, injury, or disability.” We’ve heard a lot about voluntary redundancies, migrants struggling to find work, and some going back to Uni and other reasons. The fall in participation appears to have been concentrated within the younger cohort (15-24years). Almost 60k more people were classified as ‘not in the labour force’ over the past year. So don’t be fooled by the stronger headline print (unemployment rate). Worker demand is waning, with employment contracting 0.5% over the quarter, and down 0.4% on the year – the first since September 2012, and the deepest since the GFC. The Kiwi labour market is weakening.

* Wage inflation cooled faster than expected. Annual wage growth has slowed to 3.3%, moving further away from the 4.5% peak. A shrinking proportion are receiving a payrise, with fewer enjoying a 5% increase (from 32% to 27%). And a growing share are seeing no change in pay. Weaker wage inflation however is necessary to drive an easing in domestic inflation.

* The labour market has more catch up to do. We still see the unemployment rate on track to exceed 5% in the coming year – peeling further and further away from the 3.2% low.

We expect the unemployment rate to drift higher from here. By our calculations, it is still on track to hit around 5.5% next year. That’s some distance from the 3.2% low recorded in 2021. We attributed the initial rise in unemployment to fast-growing labour supply led by rising migration. The level of employment has climbed to record highs, but growth was still not strong enough to keep pace with rapid population growth. Now, however, the increasing number of unemployed is due to a slowdown in hiring. And mounting job losses are a consequence of aggressive policy tightening pushing the economy into a downturn.

Today’s update was an important one ahead of the RBNZ’s policy update later this month. Despite a stronger headline number, the data is unlikely to skew the RBNZ’s thinking. Because the key takeaway is the same: the Kiwi labour market is weakening. A further relaxation in monetary policy settings is needed. The labour market has crumbled under the weight of the RBNZ’s heavy-handed interest rate hikes. And it’s only the beginning. Like the RBNZ, we forecast a further increase in the unemployment rate next year. But it's important for the RBNZ to stay ahead of any further labour market slowing by proceeding with rate cuts sooner rather than later. With the 2% target inflation rate well within reach, we believe the RBNZ needs to get the cash rate below 4% ASAP. We continue to expect a 50bp cut at the RBNZ’s final meeting for the year. And potentially a third 50bp cut in February.

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