Unemployment up, OCR cuts a way off, house building tanking

Despite unemployment ticking up to 4% from 3.9%, labour market conditions haven’t eased as much as the Reserve Bank expected making it likely that the first OCR cut will be later than financial markets are pricing in, says Westpac.

Employment growth has slowed below the pace of population growth and Kiwibank’s chief economist Jarrod Kerr says there are clear signs the RBNZ’s heavy handed OCR hikes are inhibiting household demand and hurting business.

“The labour market statistics lag activity in the economy, as employers hold onto employees for as long as they can, before downsizing. And we are hearing of businesses downsizing as the economy cools. The data will soften from here.”

Kerr says it's not just yesterday’s old data that lags the economy. It's about momentum and the outlook for employment into 2025.

“The economy is smaller than the RBNZ had forecast in November, and employment growth is likely to stall.  The unemployment rate is forecast to break above 5% this year, as employers 'rightsize' their businesses. It is by RBNZ design. And we're likely to see a softening in wage pressure and inflation.”

The unemployment data reduces the chances of a near-term rate cut by the RBNZ, he says. “Thoughts of cuts in May and August will likely push out to November. We're sticking with our call for cuts commencing in November.”

Westpac senior economist Michael Gordan says in the context of a slowing economy, hiring is not keeping pace with the migration-led surge in population growth.

And although the requirement to “support maximum sustainable employment” has been removed from its mandate, the RBNZ still has good reason to take careful note of these figures, he says. 

“The unemployment rate has proven to be a useful real-time indicator of how hot the economy is running. And a 4% unemployment rate is still quite low by historic standards – probably at the very lowest end of the range of what we would consider to be non inflationary.”

A broader measure of spare capacity in the labour market, the underutilisation rate, saw a more substantial rise for the quarter from 10.4% to 10.7%, Gordon says. “Even then, it was more of a return to its pre-Covid lows than a sign of outright weakness.”

Not enough houses for population explosion

High employment has been holding up the housing market, but fewer new homes are being built with the number of building approvals steadily dropping from highs of more than 51,000 consents a year being issued to about 35,000 now.

With recent numbers running more than 30% down from the same months a year earlier, it looks like we are headed toward 30,000 consents, Tony Alexander, an independent economist says.

“In an environment of strong population growth, this decline in new house supply can do only one thing to prices – push them higher.

“When we allow for demolition of existing houses to make way for new townhouses, and the fact that fewer consents progress to completions these days than in the past, we get a net addition to the country’s near two million housing stock which pales into insignificance beside the population growth.”

Kerr says New Zealand “will not build enough homes” for the influx of new migrants. “It’s pretty clear this is the big story for this year.”

The population grew 2.7% in the year to September. Housing those extra people requires roughly 50,000 extra dwellings – an increase in stock we are nowhere near achieving. But the pressures on housing are even greater than that, Alexander says.

The return of tourists and foreign students is seeing many properties go back to short-term rental from being placed in the long term pool during the pandemic in 2020.

Within this context employment is also important, with Kiwis needing to keep their jobs to be able to pay their home loans, Kelvin Davidson, CoreLogic's chief property economist says.

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