A lack of love for labour, competition and productivity

Banks economists are mostly predicting the employment rate will lift to 5.3% – the highest since 2016 – when Stats NZ’s labour market data is released on Wednesday.

ANZ is predicting unemployment will lift 0.2% from 5.1% to 5.3% as is ASB and BNZ, while Kiwibank says it will rise anywhere between 5.2% to 5.5%.

This could lead to more mortgages slipping into banks’ non-performing category. This is already at $2.457 billion – $9 million more than in May and up $550 million, or 28.9%, from $1.907 billion in June last year.

Squirrel Mortgages founder John Bolton says after the high interest rates endured over the past few years, it was inevitable the country would be in a slow and gradual recovery.

“It was to be expected when interest rates plunged in the Covid era and people took on too much debt as a result.

“When rates started to climb again, of course the hangover was going to be massive.

“There’s no silver bullet when you’re trying to come back from something like that.”

Tough going

ANZ senior economist Miles Workman says after the broadly soft monthly employment indicators over the second quarter of this year, they were expected to increase.

The ANZ Business Outlook and consumer confidence surveys show it’s tough going for businesses and households.

He says the tentative recovery in labour demand seen last quarter has lost momentum. “There’s been some anecdotes in recent months that firms holding on to labour are not experiencing the pickup in demand they expected.”

A degree of “labour hoarding” appears to have suppressed unemployment in recent quarters, and 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, Workman says.

With the high-frequency data pointing to a generalised loss in economic momentum, risks around employment growth over the next few quarters are considerable.

Not far off 2003 peak

Stagnant hiring by businesses is largely the result of weakness in labour demand, the ASB says.

It expects the economy to be close to 40,000 jobs shy of late 2023 peaks. “If not for stagnant labour force growth – driven by declining workforce participation and slowing growth in the working age population – the unemployment rate could be higher still,” ASB senior economist Mark Smith says.

“The unsettled and uncertain local and global scene and soft domestic demand are expected to contribute to subdued hiring over much of the year until strengthening domestic activity feeds through into more hiring. Before then, the unemployment rate could push higher before subsequently easing,” he says.

Weak market no matter where it sits

Kiwibank says there are many moving parts comprising the unemployment rate and the participation rate is one of them.

“The discouraged worker effect has been in full play as the labour market is no longer as attractive as it once was,” Jarrod Kerr, Kiwibank chief economist says, 

Should that effect strengthen, and the participation rate drop by more, to say, 70.6%, we could see the unemployment rate rise to just 5.2%. But if some decide to stick it out on expectations that the interest rate cuts delivered will soon lead to job opportunities, resulting in an unchanged participation rate, the unemployment rate could climb to 5.5%, he says. 

“If even more decide to dust off their CVs, and the participation rate heads back up to say 70.9%, the labour market will struggle to absorb the extra capacity, and the unemployment rate could climb to about 5.6%.”

Whether the participation rate moves up, down or stays unchanged, assuming all else equal, Kerr says the outcome still reflects a weak labour market. The balance of power has shifted back to the employers, 

“We expect to see a 0.7% quarterly rise in wages, pulling down the annual rate from 2.5% to 2.3%.”

The answer is in productivity and competition

Bolton believes the answer to getting the country back on track isn’t just about unemployment and lower interest rates.

“We’ve got a much broader problem around low productivity and a lack of competition, which needs to be addressed if we want to be truly competitive.”

An example, and one of his biggest pet hates, is the malinvestment that goes on within councils and central government.

“Things like dropping $263,000 on four sets of steps on the North Shore’s Milford Beach, millions of dollars spent on road cones and overkill traffic management as well as huge amount spent on communications staff in central government alone,” he says. 

Bolton says as it’s not their money, there seems to be this mindset where spending it wisely – and pushing contractors for the best price to get good value – isn’t even a consideration.

The other big one is a woeful lack of competition in certain parts of the economy, he says. “We’re a small country, so in many sectors (supermarkets, building supplies, banking) there just aren’t enough players to drive competitive behaviour.

“Yes, lower interest rates are part of the equation. But really, they’re just a cheap sugar rush that gets people out borrowing and spending money again,” he says. 

“Relying on debt-fueled growth is a terrible economic strategy.”

Bolton argues the country needs to work through a number of much deeper systemic issues in order for New Zealand Inc. to succeed.