Unemployment hits nine-year high with more job losses likely

The labour market went from bad to worse in the September quarter, the unemployment rate climbing to a nine-year high of 6.5 per cent.

It is up from 6 per cent in June and higher than the 6.4 per cent the market and Reserve Bank were expecting.

Economists saw the data as likely to reinforce the bank's view that it can wait until the second half of next year before raising the official cash rate.

The number of people unemployed rose by 12,000 to 150,000, the highest level since 1994. The number employed fell by 17,000 to the lowest level since the end of 2006.

Hours worked (by those still employed) fell 0.7 per cent in the quarter, continuing the trend for firms to spread the impact of recession through cutting hours where they can in preference to cutting head count. Depending on the extent to which it is offset by higher productivity, it suggests a weak GDP outcome for the September quarter.

Under-employment - the proportion of part-timers who want to work more hours - rose to 24.4 per cent (122,000 people), from 22.2 per cent three months ago and 16.5 per cent a year ago.

"Along with the 3.1 per cent annual drop in hours worked, this suggests there is significant capacity within the existing workforce to absorb any improvement in conditions once this transpires," said ANZ National Bank economist Philip Borkin.

Bank of New Zealand economist Stephen Toplis said, "In our opinion it won't be until the second half of next year until corporates start taking on staff in any meaningful number. We stick to our view that the unemployment rate will peak at around 7.5 per cent."

The Reserve Bank sees it peaking at 6.9 per cent. Toplis said if unemployment pushed past that peak it would mean more spare capacity and less inflationary pressure than the bank had anticipated.

So yesterday's weak data again called into question the financial markets' desire to price in an earlier start to the tightening than the second half of next year the bank had indicated, he said. But Westpac economist Dominick Stephens expects September to prove the last quarter of steeply rising unemployment.

"For the next year we forecast the unemployment rate to remain close to its current level with movements up or down of a couple of tenths of a per cent."

Although the data - especially the fall in hours worked which followed a 1.9 per cent fall in the June quarter - suggested the economy was slightly weaker than previously thought in the September quarter, forward-looking indicators were powering ahead, especially housing and commodity prices, Stephens said.

"We expect the Reserve Bank will be able to maintain its dovish stance only until the new year."

The working age population rose by 11,800 partly because of stronger net immigration, but the labour force (those working or actively seeking work) shrank by 4000.

The number of long-term unemployed (for more than six months) has more than doubled, to 35,000, over the past year.

Most of the year's job losses were in manufacturing (down 27,000), construction (down 10,000) and retail trade and accommodation (down 12,000).

By contrast public service occupations rose, with 12,000 more in healthcare and social assistance, and 10,000 more in public administration and safety than a year ago.

In all, Toplis said, the government-dominated sectors saw employment rise 4.9 per cent, partially offsetting a 3.9 per cent fall in the rest of the economy.

"On the one hand you can say thanks to the Government for preventing what otherwise would have been an even worse economic picture, but one can also see the difficulties the Treasury faces in getting its books in order."