The Economy Goes Down, Unemployment Goes Up

• Stats NZ’s suite of labour market data is out on Wednesday. The Kiwi labour market likely loosened further over the December quarter. We expect the unemployment rate lifted to 5.1% from 4.8% - the highest in four years.
• The moderation in wage inflation likely continued in Q4. We expect wages grew 2.9% over 2024, a meaningful slowdown from the 3.9% gain in 2023. Weaker wage inflation should help drive further easing in domestic inflation.
• Weak labour demand is expected to continue as the economic recovery is yet to gain ground. A third straight 50bp cut next month is close to a done deal. And we forecast further cuts to the cash rate this year.

The December quarter is coming together. Last week was all about inflation. And it was good news, with the headline rate steady at 2.2%. Next week, we’ll see how the Kiwi jobs market fared at the end of last year. And we expect a continued loosening in labour market conditions. By our calculations, the unemployment rate likely lifted to 5.1% from 4.8% - the highest rate in four years.

The labour market lags the broader economic cycle. But it’s catching up now. Down went the economy in 2024, up goes the unemployment rate. Following a period of strong employment growth in 2022/23, hiring has slowed. Firms simply do not need workers with the same desperation as past years. Stats NZ’s monthly employment indicator has shown the number of filled jobs in a quick descent since March last year. Over 30,000 (net) jobs were lost in 2024. The conceptual differences between Stats NZ’s filled jobs data and Household Labour Force Survey (released on Wednesday) must be noted, with the former being drawn from tax data. Nonetheless, we have pencilled in a modest 0.2% quarterly decline in employment, following Q3’s 0.5% fall. Employment has lost its shine and is driving further slack in the labour market.

The jobs data is a key statistic before the February MPS. Our forecasts are largely in line with the RBNZ’s latest projections. With the 2% target inflation rate virtually reached and core inflation also trending lower, we believe the RBNZ needs to return policy to a more neutral setting. We continue to expect a 50bp cut at the RBNZ’s first meeting for 2025. And a 25bp cut in April/May. The debate now centres on how far the RBNZ cut the cash rate below 3.5%. The RBNZ track signals a long pause. We think another 50bps, with risk of more.

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