Don't expect quick jobs growth, warn economists

ASB chief economist Nick Tuffley speaking at last year's 'Keeping Northland Working' conference. Photo / Northern Advocate.

Economists thought unemployment was likely to peak at around 7 per cent during 2010, with a recovery likely to take years rather than months.

But today's surprise 7.3 per cent is being put down to an unexpected increase in the population of those people counted as working age.

ASB chief economist Nick Tuffley said working age population had increased slightly more than he had expected, and not enough jobs were being created to fill the gap.

"There seems to be enough [working age population growth] to push unemployment up," he said.

He said people who had "dropped out" of the workforce before were now "coming out of the woodwork" again and looking for jobs.

"That does mean that, going forward, a fair amount of people who are looking for work but aren't lucky enough to find it," he said.

Tuffley said the unemployment rate was likely to rise a bit further, possibly peaking at 7.5 per cent.

"I think we are fairly close to the peak, but the challenge going forward is that we do need to see some jobs being created to absorb these fresh people looking for work," he said.

Speaking before this morning's stats result, Nick Tuffley said the "general view" was that the labour market was stabilising, and unemployment would peak at 7 per cent later this year.

"The issue you have now is that the number of unemployed is still creeping up," he said.

Tuffley said despite the labour market remaining flat over the final quarter of last year, this failed to address working population growth, such as new migrants and young people reaching employment age.

"So just stable employment isn't enough," he said.

AUT economics department head Tim Maloney said the Treasury's earlier prediction that the jobless rate would peak at 7.5 per cent was "a little pessimistic".

"I think [unemployment] is going to peak a little lower than that, probably at about 6.8 or 6.9 per cent," he said.

Maloney said it would take one or two years for unemployment levels to fall back below the 5 per cent mark.

BNZ Capital senior economist Craig Ebert said the BNZ's formal forecast was for unemployment to peak at 7.5 per cent mid-year.

He said New Zealand's economy would require two years of sustained GDP growth, at around 3 to 4 per cent, to get unemployment down around the 5 per cent mark.

"You have to have growth running a bit faster than normal, so you need to see a pretty decent pick-up in GDP and we are starting to see signs of that," Ebert said.

He said such a sustained growth phase was "possible but not probable".

Tuffley said the overall level of unemployment throughout the recession, and into the recovery, had "held out" better than most economists expected.

"What was interesting about this downturn was that redundancies were a last resort, and there was flexibility on employee's parts, but also on employer's parts," he said.

Tuffley said measures such as employees working reduced hours, along with wage freezes, meant many workers managed to hold onto their jobs during the downturn.

"The benefit of that was that we still had job losses, but not as many as we would have had."

But Tuffley said this factor would have a negative impact on the job market's recovery.

"The employment market is going to be slow to recover because lots of people are still on the books. That means in the early stages of the recovery businesses aren't going to need to rush out and hire people."

He added it was unlikely that the economy would experience an "explosive rebound" like that seen in the wake of the Asian financial crises in the late 1990s.

Ebert said it would be best to avoid such a rebound, as the extremely low unemployment New Zealand experienced before the recession was a clear sign the economy was "overheating" as it headed towards the downturn that eventually ensued.

"The sort of slow-down we've been through was just to get rid of that heat," he said.

Council of Trade Unions (CTU) economist and policy maker Bill Rosenberg said unemployment was likely to peak at around 7.1 or 7.2 per cent in the middle of this year.

"I'm not sure [unemployment] will get a lot worse, but I still think we are a long way from the bottom of the trough as far as unemployment goes," he said.

Rosenberg said the recovery would be slow, with unemployment likely to hover around the 6 per cent mark for two to three years.

"The employment scene could be quite difficult for people for some time," he said.

Rosenberg said jobs in the manufacturing and construction sectors had been particularly hard hit by the recession, and the Government needed to continue its stimulus plan until "we are well out of the unemployment trough".

He said employers should not cut back wage increases, as the more money workers have to spend the faster the economy will recover.

Rosenberg added that falling unemployment levels in Australia could send increasing numbers of Kiwi workers across the Tasman.

"For many Kiwi workers the recovery is not yet in sight," he said.