Unemployment predicted to peak at 5 percent as labour market and inflation remain tight

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The unemployment rate is expected to creep up further as inflation measures continue.
Photo: RNZ

The latest unemployment figures show the number out of work is at its highest in two years, while wage inflation is dropping.

The under-utilisation rate – which reflects untapped capacity in the market, including the unemployed, and those working fewer hours than they would like – is also up by 0.5 percent.

The Reserve Bank is likely to feel a sense of relief as it looks to slow inflation – but what do these figures mean for businesses?

ASB senior economist Mark Smith said the third-quarter 3.9 percent increase in unemployment was to be expected after borders reopened to migrant labour.

He said unemployment should peak at around 5 percent in the next 12 months.

While the current impact in the labour market would hit jobseekers, businesses were also feeling the effects with a slowdown in investment and growth.

Chief executive of Business New Zealand Kirk Hope believed the rise in unemployment would help to lower inflation, but warned the labour market would remain tight for some time to come.

“I don’t think it’s any pause to celebrate when the unemployment rate goes up. However, as a consequence of that, what you’d expect is to see some heat come out of the economy.”

Hope believed businesses would face a material impact as the Reserve Bank attempted to balance inflation and unemployment in the economy.

Hope believes the government will need to control spending in order to avoid to balance unemployment and inflation long-term.
Photo: RNZ/ Dan Cook

“Those increases in interest rates have a very material impact on businesses capacity and appetite for investment. So, it makes a very material difference in terms of growth and the future if people stopped doing that.”

Asked if the Reserve Bank could be more aggressive in achieving its inflation targets, Hope said it had been among one of the most active of the globe’s central banks.

“The Reserve Bank has actually been probably one of the most aggressive central banks in the world in terms of raising the official cash rate.

“I guess the key thing from a business perspective is a long-term trajectory for the interest rate. That’s confidence to invest over the long term.”

Hope said the government would have a key part to play in trying to meet the needs of business by managing spending – so they’re not contributing to inflation and increasing unemployment; and going too fast to reduce inflation could be more detrimental to the job market, and closer attention to fiscal policy would be needed to manage inflation long-term.

“I think a number of central bank members have always said monetary policy needs mates and that is fiscal policy. So, you need to have a very measured fiscal policy if you’re going to have a very aggressive set of interest rate rises. The government therefore needs to make sure it’s tightening its belt and doing its job to manage inflation as well.”

Acting Minister for Social Development and Employment Carmel Sepuloni said 3.9 percent unemployment was still relatively low, but the government had been mindful of the possibility of higher unemployment as a result of inflation measures.

“We wanted to turn our minds to both things – keeping people in work while getting inflation down. It’s a very hard balance.”

Sepuloni said the government expected a rise in claimants for out-of-work benefits, accepting that some may not be eligible for support because of their personal circumstances.

“Inevitably if the unemployment rate increases, you do see more people come on benefit but there are also a number of people who are not eligible. Maybe [because they’re] in relationships – so they won’t actually be able to access a benefit if they lose jobs, but their households and their families will struggle as a result of that, so I’m watching that very closely.”