Shorter working week masks weak employment: NZIER

Tuesday 1st December 2009

New Zealand’s labour market is probably weaker than the 6.5% headline unemployment number, with capacity closer to levels last seen in the early 1990s when the economy was undergoing a major transformation, according to the New Zealand Institute of Economic Research.

Businesses have slashed working hours in response to the country’s longest recession since the 1970s rather than laying off staff, principal economist Shamubeel Eaqub told a briefing in Wellington. While this will make it easier to ramp up activity, it has masked the weakness of the labour market, which has an effective unemployment rate of 11%, according to NZIER estimates.

Job advertisements are “extremely low and businesses haven’t translated intentions into actions yet,” Eaqub said. “This is the big risk the householder sector and retail sector faces unless the labour market shows signs of improvement.”

The unemployment rate rose to a seasonally adjusted 6.5% in the three months ended September, according to government data, the highest level since the so-called “Winter of Discontent” in 2000, in its seventh straight quarterly gain as firms struggled with the fall-out of the global financial crisis.

At the time, Finance Minister Bill English said the headline number could’ve been worse had companies decided to slash staff numbers to maintain their profit margins. English is picking the unemployment rate to peak at about 7% next year, while the NZIER expects it rise as high as 8%.

Eaqub said the over-valued housing market remains a major threat to the economy, though this may ease when net migration, which has underpinned the country’s economic recovery, turns around as Australian growth ramps up next year and attracts New Zealanders in search of better prospects across the Tasman.

“Net migration has been a plank of support for economic activity, though we have strong suspicions we will see this slowing next year,” he said.

The risks to the economy will give the Reserve Bank room to keep interest rates at a record low 2.5%, and the government’s withdrawal of fiscal stimulus should give Governor Alan Bollard between 35 and 100 basis points to play with, Eaqub said.

With more people on floating mortgages, any increase in the official cash rate should have a much greater impact on households than two years ago when Bollard boosted rates as high as 8.25% in a bid to damp a surging property market.

Eaqub doesn’t expect an increase in rates until the September quarter next year, which is much later than the market expectation of a first-quarter hike. “A lot of people want the Reserve Bank to run too aggressively,” he said. “For a change, I’m backing Dr Bollard” to keep rates low, he said.

Despite the risks to the economy, the NZIER is more optimistic about New Zealand’s recovery, predicting the economy will shrink 0.9% this year compared to a contraction of 1.6% according to the market consensus, while it projects gross domestic product will grow 2.6% next year, compared to 2% growth forecast by other economists.

Businesswire.co.nz

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