Unemployment set to linger as wage growth remains steady

• Unemployment expected to remain steady at 5.3 pct - data due 4 Feb, 10.45 am.
• Labour market probably at the bottom, but improvement gradual.
• Prospect of some modest job growth.
• Wage growth to remain subdued, lagging inflation.
• Data not likely to change RBNZ rates on hold policy.

Unemployment looks set to linger around a near-decade high, but may show signs that the labour market downturn has ended.

Most major bank economists expect the unemployment rate to stay unchanged at 5.3 percent for the three months ended December, but with tentative signs of employment growth, and wage growth subdued.

ASB senior economist Mark Smith was among the more optimistic with a forecast unemployment rate easing to 5.2 percent, which would be the first decline in four years.

"We expect the data to confirm we have passed the turning point for the labour market."

Other economists echoed the view that the labour market, the sector that lags recessions and recoveries, has at least touched the bottom.

"We do expect this Wednesday's suite of ... labour market data to show a general halting of deterioration as well as some more signs of improvement in the details," BNZ senior economist Doug Steel said.

Labour market numbers can be something of a statistical lucky dip.

The unemployment rate can be moved by the size of the workforce, how many are participating, have gone training or stopped looking for work, irrespective of how many jobs may have been created.

ANZ senior economist Miles Workman said more people participating in the search for work, even if the jobs were not there, might still be a positive.

"While it would point to a more disinflationary labour market than the RBNZ anticipates, it would also add to the evidence that conditions are rounding a corner, with labour supply responding to improving job prospects."

The jobs are coming

Partial labour market indicators in the recent months, such as job advertisement and filled jobs numbers, point to an increase in jobs matching the growth in the working age population.

"Employment is expected to register its strongest growth in around two years, although numbers are still more than 30,000 shy of late 2023 peaks," ASB's Smith said.

However, Westpac senior economist Michael Gordon said overall improvement would be gradual with employers being wary of hiring.

"The September quarter saw a strong lift in hours per worker, and indeed that's where we'd expect to see the initial response to an economic upturn - employers have scope to get more out of their existing workers, before resorting to new hiring.

Slow wage growth to please RBNZ for now

Wage growth is expected to remain subdued and steady around four-year lows of 2 percent.

"Labour cost growth is expected to remain modest, with the balance of power still tilted towards employers," ASB's Smith said.

He said emerging signs of skilled labour shortages, a stronger labour market and growing wage demands would eventually weigh on the Reserve Bank's official cash rate outlook (OCR).

"Reducing labour market slack suggests the need to normalise OCR settings. We expect a 25 basis point hike in December and a 3.0 percent OCR endpoint, but note the risks are pointing to a larger and more frontloaded pace of OCR hikes."

The RBNZ is expected to hold the cash rate steady at 3.25 percent for most of this year.

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