News & insights

Summary

• The New Zealand labour market modestly cooled in the December quarter but was stronger than the Reserve Bank and most economists expected.
• The Reserve Bank is not likely to be comfortable with slow easing in labour market pressures. It will, therefore, likely maintain its vigilant monetary policy stance at its 28 February meeting.
• We continue to expect fading inflation, softening economic activity, and a cooling labour market will persuade the Reserve Bank to start cutting the OCR from August this year.

Labour market still heated

The unemployment rate inched up to 4.0% in the December quarter from 3.9% in the September quarter.

This was largely due to an increase in the labour force, which outweighed a slight fall in the participation rate and increase in employment in the quarter. If it were not for the recent surge in net inward migration, which has undoubtedly boosted New Zealand’s labour force, the unemployment rate would have been materially lower.

Positive growth in employment and hours worked in the December quarter indicates that economic activity likely rebounded in the period from a weak September quarter.

Wage growth eased modestly, with the Labour Cost Index for the private sector slowing to 3.9% in the December quarter from 4.1% in the September quarter and compares to its recent peak of 4.5% in the March quarter 2023.

Reserve Bank won’t relax its inflation fight yet

Because wage growth is a key determinant of domestic services inflation, its continued moderation is critical to inflation sustainably easing towards the Reserve Bank’s 1-3% inflation target. While the labour market is cooling, it is doing so at a pace that likely does not yet give the Reserve Bank enough comfort inflation is heading sustainably towards its inflation target within a reasonable period.

As the December quarter labour market statistics provide the last major piece of evidence the Reserve Bank has before its next Official Cash Rate (OCR) review on 28 February, it is likely to maintain its recent hawkish outlook with no OCR cuts expected until at least the first quarter of 2025. This is a stance that was strongly inferred by a recent speech by the Reserve Bank’s Chief Economist in which several reasons were given for continued vigilance in the Bank’s inflation fight. The Reserve Bank will likely, therefore, join a growing list of central banks around the world pushing back on market expectations of policy interest rate cuts as early as mid-2024.

While the labour market is cooling at a glacial pace so far, it is a lagging indicator of the health of the New Zealand economy. We continue to expect fading inflation, softening economic activity, and a cooling labour market will persuade the Reserve Bank to start cutting the OCR from August this year.

John Carran is an Investment Strategist and Economist and John Norling is Director, Head of Wealth Research at Jarden. The information and commentary in this article are provided for general information purposes only.  It reflects views and research available at the time of publication, using external sources, systems and other data and information we believe to be accurate, complete and reliable at the time of preparation. We make no representation or warranty as to the accuracy, correctness and completeness of that information, and will not be liable or responsible for any error or omission. It is not to be relied upon as a basis for making any investment decision. Please seek specific investment advice before making any investment decision or taking any action. Jarden Securities Limited is an NZX Firm. A financial advice provider disclosure statement is available free of charge here.