Turning the tide: Unemployment’s impact on NZ’s inflation battle

Source: Nigel Tutt, Priority One Chief Executive

Recent unemployment figures released by Statistics NZ will have a significant effect on the New Zealand and local economy in the year or two ahead. Our country, like the rest of the world, has been grappling with high inflation post covid. Of course, high inflation is destructive for an economy so central banks seek to squash it with all their might, which means raising interest rates.

We have seen the effect of higher interest rates here mainly in higher mortgage rates, which causes lower consumer spending and reduces inflation. One item that has not been working in the Reserve Bank’s favour however is the extremely tight labour market. The unfortunate reality is that when unemployment is very low, wages and costs for business will remain relatively high. The unemployment rates of 3%-ish that we have seen in the past few years is extremely low in historical terms. This holds back efforts to reduce inflation.

That equation seems to be changing at the moment however, with businesses far less confident in the economy than they have been in the past and some reports of insolvencies and redundancies. Unemployment rates released last week show a jump to 3.9%, with many economists expecting it to move to around 5% late next year.

We can expect to see some fall out from that locally, while many view our economy as stronger than NZ’s, we have seen a significant drop off in job ads over the last few months. Talking to employers, they are much more cautious but also wary that the talent market remains tight at the moment. While we can expect to see a reduction in hiring intentions, I think we are a long way away from dramatic changes to unemployment locally.

The other large factor in freeing up the tight labour market is immigration, and this is an area where New Zealand has seen dramatic change, with a net increase of around 65,000 people during the last year. While this theoretically means more choice for employers, it also creates additional infrastructure requirements – roads, schools and housing. Locally, this has a spillover effect, with our population continuing to increase at a relatively high rate, 2.6% last year.

Unfortunately, increases to unemployment are a necessity if we are to reduce inflation, from the most recent stats it looks like the market is finally changing.  While we can expect a more subdued employment environment in the short term, this is needed for a more balanced economy in the longer term. After a wait and see approach to reducing inflation we can now be confident that we are on the right track.