Early recovery lifts hours, but unemployment still elevated
New Zealand’s labour market ended 2025 looking soft but slowly stabilising – a backdrop Kiwi mortgage advisers need to watch closely as they assess income risk, refinancing appetite, and the timing of future rate hikes.
Westpac NZ chief economist Michael Gordon (pictured) says the Q4 surveys show “the labour market remains soft, but with some early signs of improvement as the economy starts to regain momentum.”
The number of people employed rose by 0.5% in the December quarter, more than the 0.3% Westpac expected, and is now 0.2% higher than a year ago. However, an even larger lift in labour force participation meant the unemployment rate “ticked up from 5.3% to 5.4%, its highest in over ten years.”
Gordon notes it’s not unusual for both employment and unemployment to be higher than forecast, and in these cases Westpac “typically recommend focusing on the unemployment rate,” which was only slightly above its 5.3% forecast and “not meaningfully different.”
More hours, not yet more hiring
Beneath the headline, employers are leaning on existing staff rather than embarking on a full hiring spree. The Household Labour Force Survey recorded a 1% increase in hours worked in the December quarter, on top of a 1.1% rise in Q3.
Gordon notes that in the early stages of an upturn, “it’s not surprising to see businesses trying to get more out of their existing workers, before resorting to more hiring.”
The participation rate rose from 70.3% to 70.5%. While Westpac suspects some sampling noise, it argues the cyclical downturn in participation now looks to have run its course. Over the longer term, participation faces a “tug of war” between an ageing workforce and people working longer.
Wage growth cools, easing pressure for rapid hikes
For the Reserve Bank, wage trends are crucial. Westpac says annual wage inflation has “slowed to around 2%,” with increases “largely limited to cost-of-living adjustments.” The Labour Cost Index rose just 0.4% in Q4, taking annual growth to 2.0%, the slowest since March 2021, while the unadjusted analytical LCI has eased to 3.3%.
“This was the last major data release ahead of the RBNZ’s next policy review on 18 February,” Gordon said, adding that results are broadly in line with the bank’s expectations. Crucially, “still-muted wage pressures mean that there is time to assess the strength and durability of the recovery before raising rates. We remain comfortable with our forecast of a December 2026 OCR hike.”
See the full Westpac report here for more information.
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