Job market softens as wage growth trails inflation
New Zealand’s unemployment rate lifted to 5.2% in Q2, up from 5.1%, a smaller-than-expected rise, but the underlying picture points to further challenges ahead, according to BNZ’s Mike Jones (pictured).
The economy shed about 2,000 jobs over the quarter and 16,000 over the past year, according to Stats NZ. The participation rate fell to 70.5%, its lowest since March 2021, partly due to more young people returning to education in softer labour market conditions.
“Unemployment would have lifted by more were it not for discouraged workers leaving the labour force,” Jones said in a BNZ blog, with the participation rate falling to a four-year low.
Youth unemployment and Auckland’s jobless rate both reached highs not seen in more than a decade, while Otago recorded just 2.9% – continuing its “southern outperformance” trend.
Average hours worked per person fell to the lowest level on record outside the COVID period.
“It could force additional layoffs should the work not start rolling in soon,” Jones said.
Wage growth now lagging inflation
The June quarter Labour Cost Index (LCI) wage inflation slowed to 2.4% year-on-year, down from 4.3% a year ago, slipping below the 2.7% annual inflation rate.
This ends “five quarters’ worth of modest inflation-adjusted wage gains,” Jones said.
The ‘unadjusted’ LCI still shows growth in compensation ahead of inflation, but not when compared with a simple measure of ‘essentials’ inflation – petrol, energy, food, and rates.
“The purchasing power lost in a bout of inflation can be felt long after said inflation has subsided,” Jones said.
Household incomes and wealth under pressure
Inflation-adjusted household income growth turned negative in March, and “household net wealth has flat-lined since late 2021” as gains in financial assets have been offset by housing asset values, the BNZ analysis showed.
With wage growth easing and CPI inflation forecast to peak at 3% in Q3, “it’s another headwind… bearing down on retail spending.”
Jones noted that “consumer confidence needs to lift a long way from here” for forecasts of a household spending rebound to be realised.
Outlook: OCR cuts expected to support recovery
From Q4, some real wage improvement is expected as inflation eases, and mortgage refixing frees up cash. However, risks to spending forecasts remain.
“It’s increasingly clear that the wobbling economic upturn needs a little more help from interest rates,” Jones said, maintaining the view that the official cash rate will fall below 3% this year, with 25-basis-point cuts in both August and October.
Markets are “boosting the odds we see additional falls in short-term retail interest rates,” he said.
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