No loosening of high OCR settings

The bank says the high OCR looks necessary and a cut is not likely until 2025, with monetary settings to remain tight until at least mid-2026.

While inflation has come off its peak, a persistently tight labour market and higher wage growth have been formidable forces against the RBNZ’s fight to get inflation down to the 1-3% target range.

A number of bank economists are predicting the labour market data will show unemployment rising a few notches up from 3.6% to 3.8-3.9% in the quarter to 30 September and above 5% next year.

ASB senior economist Mark Smith says the pace of hiring is expected to slow given the catch-up from post-COVID worker shortages appears to have largely run its course.

“At the same time, firms are still reluctant to hire given the economic outlook and election-related uncertainties. The surging cost of living and record numbers of work-ready immigrants are expected to show labour force growth outstripping that of employment, with the labour market participation rate potentially hitting a fresh record high,” he says. 

Smith says as a result, the unemployment rate is expected to hit its highest level since mid-2021 and is on track to approach 5% by the end of next year.

Two forces are in play which together are pushing up the unemployment rate, says Jarrod Kerr, Kiwibank chief economist.

Firstly, labour supply continues to recover with the arrival of permanent long-term migrants. In July and August, monthly migration flows averaged a net gain of 8,200.

“It’s a softer run rate than the double-digit gains over the first half of this year, but still a decent influx. And many of these migrants are ready and able to work,” Kerr says. 

Engagement with the labour market has also never been stronger. The participation rate is currently at a record high of 72.4%.

“The ongoing cost of living crisis continues to force people into the labour force,” he says.

“Secondly, the influx of work-ready migrants is helping to expand the size of the labour force. Both drivers have seen the participation rate increase for the last five quarters. We, once again, expect a slight lift in the participation rate to a fresh record high of 72.5%. But we suspect that it is nearing the peak.”

NZIER’s latest QSBO shows the difficulty in finding workers has eased. Skilled workers are more plentiful. For unskilled labour, a growing proportion of firms are reporting that they are easy to find. The search for labour is no longer the primary constraint for businesses. Border restrictions have been relaxed, and the talent pool has expanded.

However, Kerr says the supply of labour is recovering at a time when demand for labour is beginning to break down. Despite a greater availability of workers, filled jobs data appears to have turned a corner. While there was further jobs growth over July and August, it was at a softer pace.

“Firms are no longer hiring with the same gusto. And neither are they looking for workers with the same desperation,” he says.

According to MBIE data, the number of job vacancies advertised online declined about 8% in the quarter, and more than 25% compared to last year’s levels.

Kerr says there are clear signs the tight financial conditions are already restraining demand. “If firms expect to pump out less output, then an extra pair of hands may prove unneeded and instead too costly.”

Westpac expects employment growth to weaken further in the coming quarters, penciling in a 0.6% quarterly rise in employment to 30 September, down from the second quarter’s almost 1% gain.

Westpac senior economist Darren Gibbs says indicators suggest that employment growth has begun to slow in recent months.

For example, the QSBO survey pointed to a marked reduction in perceived skilled shortages and a sharp reduction in the proportion of firms citing labour as a constraint on output.

Meanwhile, the uptrend in the number of people on Jobseeker benefits – albeit only loosely correlated with the unemployment rate – has continued through the quarter (recent migrants will not be eligible to receive these benefits).

“Aside from the unemployment rate, we will also be interested in developments in the underutilisation rate – a broader measure that includes, for example, those seeking more work. The latter stepped up 0.7pts to 9.8% in the June quarter.”

Gibbs says a marked loosening of the labour market is a critical part of the bank’s and RBNZ’s forecast – that domestic inflation will moderate by enough to allow overall Consumer Price Index (CPI) inflation to move back into the target range over the coming year or so.

ASB’s Smith says the bank expects the unemployment rate to move below its maximum sustainable level by the end of next year. This should temper wage increases and significantly dampen pressures on core inflation.

“Nonetheless, the starting point for labour cost growth is high, and the RBNZ will be wary of the risk that labour cost and core inflation does not cool as quickly as it is comfortable with. We believe 5.50% is the OCR peak this cycle but note the RBNZ will be vigilant to signs of inflation settling above the top of the 1-3% target band.”