Unemployment set to rise to highest level in nearly a decade

Unemployment is expected to keep rising for several more months. Image / Depositphotos

Westpac economists say data released this Wednesday will show unemployment has risen to 5.3% – the highest it has been in nearly a decade.

“This would take it beyond its lockdown-era peak, and up to its highest level since 2016,” said Westpac senior economist Michael Gordon.

“We’ve come a long way from the post-Covid period of an overheated economy and severe labour shortages, when the unemployment rate reached a record low of 3.2%.”

ANZ’s economics team is also picking 5.3%.

“New Zealand’s fragile economic recovery is under way. But given the typical lags, the recovery will likely take a few quarters to be reflected in the unemployment rate,” said senior economist Miles Workman.

Other than Budget 2025, this is the last major piece of domestic data before the RBNZ’s May Monetary Policy Statement, he said.

“However, it’s fair to say that changes to the RBNZ’s economic forecasts are likely to end up more meaningful for the monetary policy outlook than starting-point news.”

Economists at ASB see the unemployment rate landing slightly lower, at 5.2% for the quarter. That’s in line with the Reserve Bank’s most recent forecast.

It would still be the highest in just four-and-a-half years (unemployment peaked at 5.2% in late 2020 after the Covid shutdown recession).

Senior economist Mark Smith said he expected broadly unchanged employment levels, with modest increases in the labour force pushing the unemployment rate marginally higher.

“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,” he said.

“Low growth in the labour force will dampen the peak in the unemployment rate (in the low 5s for much of 2025), with the unemployment rate subsequently easing.”

Wage growth was expected to be a bit of a mixed bag, said ANZ’s Workman.

But broadly it was expected to continue to ease – consistent with loose labour market conditions and the RBNZ’s objective of bringing down domestic inflation pressures.

Westpac’s Gordon said he expected the private sector Labour Cost Index to slow to 2.5% (per annum), which would be the slowest rate of growth since 2021.

“Our forecasts of both unemployment and wages are softer than what the RBNZ assumed in its February Monetary Policy Statement,” he said.

The RBNZ had forecast a rise in the unemployment rate to 5.2%, and that this would mark the peak for this cycle.

“We suspect the RBNZ is overestimating how quickly the labour market will respond to the broader upturn in the economy,” Gordon said.

“Typically, it’s one of the lagging aspects of the cycle. That said, if next week’s results are more in line with our forecasts, we don’t think they would have a great deal of influence on the RBNZ’s thinking.”

Westpac is still expecting another 25bp cut in the OCR at the May 28 policy review.

Given how much “turbulent water had flowed under the global economic bridge” since the end of the first quarter, it was likely that the labour market’s trajectory could end up “playing second fiddle” to any changes in the RBNZ’s outlook, said ANZ’s Workman.

“That’s not to say the starting point won’t matter,” he said.

“We’d just highlight that a positive surprise on the day (eg a tighter labour market than expected) may be more than offset by a more pessimistic growth outlook, while a negative surprise could instil a greater sense of urgency to lean against US-induced economic headwinds.”

Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist and also presents and produces videos and podcasts. He joined the Herald in 2003.