Unemployment set to stay at near-decade high, economists say

• Unemployment expected to remain steady at 5.4 pct - data due 6 May, 10.45am
• Middle East conflict likely to dampen previous tentative recovery signs
• Labour market recovery now likely a 2027 story
• Wage growth to remain subdued at 2 percent, lagging inflation
• Stagflation risks grow - high inflation, low growth, rising unemployment
• Data not likely to change RBNZ rates on hold policy - for now

Unemployment looks set to linger around a near-decade high as the Middle East conflict dampens tentative signs of a recovery this year.

Major bank economists expect the unemployment rate to stay unchanged at 5.4 percent or nudge slightly higher for the three months ended March.

ASB economist Wesley Tanuvasa said the data would largely show the state of the market before the conflict broke out, but he expected a bigger workforce and greater demand for work to push unemployment higher.

"[The] labour market data is expected to reflect a firming employment trend and strong labour supply response, but headline numbers will likely remain weak. This is expected to push the unemployment rate up to 5.5 percent. Labour cost growth should remain modest."

Labour market numbers can be a statistical lottery, with the unemployment rate moved by the size of the workforce, how many are participating, are doing training, have stopped looking for work, irrespective of how many jobs may have been created.

BNZ economist Matt Brunt said business surveys, such as the Institute of Economic Research's quarterly survey (QSBO), have shown a slide in confidence, which would most likely show a more pronounced hit to employment intentions.

"The latest QSBO showed some softening in hiring intentions. However, the responses deteriorated as the month progressed ... when employment intentions were much weaker and consistent with net labour shedding."

The BNZ now expected unemployment to hit 5.8 percent later in the year.

Toxic stagflation

ASB's Tanuvasa said labour market recovery was now likely a story for next year because of the Middle East conflict.

"We do not envisage a labour market recovery unfolding until 2027 and cite heightened stagflationary risks over 2026 given higher near-term unemployment and higher near-term inflation."

Stagflation is a toxic mix of slow economic growth, high unemployment, and high inflation.

The Reserve Bank no longer has a specific instruction to help the labour market and maximise employment, but nonetheless always casts an eye over labour market health.

Tanuvasa said the RBNZ was faced with how soon before it moved to dampen inflation caused by the conflict and the negative effects on the economy higher interest rates might have.

"[This] makes the trade-offs of monetary policy significantly more complex and painful for the economy. There are few, if any, winners in a situation like this."

The RBNZ next meets in three weeks, with financial markets pricing in a 40 percent chance of a 25 basis point rise in the official cash rate to 2.5 percent. However, the majority view remains a series of rapid fire rises from September to 3 percent by the end of the year.

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