Just under 50,000 people may need to lose their jobs before the Reserve Bank Te Pūtea Matua can bring inflation under control.
Economists at the Financial Services Council conference in Auckland on Wednesday followed an upbeat presentation by Finance Minister Grant Robertson with a more doom-laden panel assessment of the next 12 months for the economy.
Robertson said he didn’t want people to talk themselves into a negative frame of mind, telling delegates there was “every reason to be optimistic” about the year ahead.
But the economists who followed him on the conference podium struck a less upbeat tone, saying unemployment might have to rise from 3.3% to 5% before inflation was back within the central bank’s target range of 1% to 3%.
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“The Reserve Bank published a forecast of 5% in their last monetary policy statement,” said Sharon Zollner, ANZ’s chief economist.
“It’s quite reasonable to interpret that as their best estimate for what they think they need to see,” she said.
Mark Lister, head of private wealth at Craigs Investment Partners, said: “The central banks are driving the ship at the moment, aren’t they? I think the outlook is in a big way a function of how they operate.”
But he said: “Going from 3.3% in the March quarter to 5% is quite a big move.”
The 3.3% unemployment rate in the June quarter represented 96,000 people, data from Stats NZ shows.
In December 2020, when the unemployment rate was 4.9%, the number of unemployed people was 141,000.
An unemployment rate of 5% was still low in the context of history, Lister said.
But Zollner said the rise would be as rapid a rise in unemployment as when the global financial crisis (GFC) hit.
There was the risk that the Reserve Bank’s actions could drive unemployment higher.
Zollner said ANZ now expected the Reserve Bank to crank up the official cash rate (OCR) from its current 3% to 4.75% by the end of May next year.
The economists were not certain whether the country would avoid a technical recession of two quarters of negative growth.
Zollner said that definition was not how the public thought of a recession.
“For the person the street, they define recession in terms of employment,” she said.
The current labour market was “very, very tight”, she said, and bringing down inflation required “some spare capacity” in the labour market.
It was a hard thing for the Reserve Bank to talk about, she said.
“It’s a difficult thing for them to talk about. To beat inflation, they require some people to lose their jobs. That’s a comms challenge right there,” she said.
Unemployment had not been this low since the 1980s, Lister said.
“You’ve got to cause some pain. You’ve got to create some unemployment,” he said.
Rising unemployment meant it would be hard to avoid recession, he said.
“It’s going to be pretty tough to curb the inflation rate without generating some hardship,” said economist Eric Crampton from the New Zealand Initiative.
The Reserve Bank’s job of bringing inflation down was fighting against the inflationary effect of high Government spending, he said.
“You’re spending a lot of money, positive fiscal impulse, deficit spending while the economy is insanely overheated. That does not make the Reserve Bank’s job any easier,” he said.
Labour market statistics don’t just track that capacity in the unemployment figures. They also track the “underutilisation” rate.
This is a combination of the unemployment rate, and people who have part-time work, but want to work more, as well as a handful of people who are job-hunting, but not available to start until next month.
The underutilisation rate for the June quarter was 9.2%, or 276,000 underutilised workers.
The last time the unemployment rate was near 5% was in the December quarter of 2020. It ended the quarter at 4.9%.
At that time the underutilisation rate was 11.9%
Different groups in society experience job losses to different degrees.
When unemployment was at 4.9%, the unemployment rate for Māori was 9.1%, compared to 3.7% for Pākeha.
The same pattern could be seen in the underutilisation rate, which was 19.4% for Māori, and 10.8% for NZ European.
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