New Zealand Employment Growth Slows Amid Rising External Risks

The latest employment data from Statistics New Zealand has revealed a soft pace of job creation in the first quarter, with the unemployment rate holding steady at 5.1% - a level not seen since mid-2019. This moderation in labor market growth, combined with wage inflation easing and domestic demand remaining sluggish, is reinforcing expectations for more interest rate cuts later this month and throughout the year.

The Reserve Bank of New Zealand (RBNZ) has already slashed the cash rate by 200 basis points since August 2024 to 3.5%, in an effort to stimulate economic growth amidst rising external risks stemming from US President Donald Trump's global trade war. Analysts say the jobs data supports their predictions for a further round of cuts during the year.

Statistics New Zealand released its employment and unemployment data on Wednesday, revealing that while employment increased by just 0.1% from the previous quarter, the unemployment rate remained unchanged at 5.1%. Economists polled by Reuters had forecast an unemployment rate of 5.3% and a corresponding rise in employment. The RBNZ had also expected the jobless rate to be slightly higher at 5.2%.

Economists Weigh In On the Jobs Data

ANZ Bank senior economist Miles Workman noted that the broader suite of data continues to suggest there's excess capacity in the labor market, which will likely translate into continued waning domestic CPI inflation pressures for some time yet. He reaffirmed his expectation that the central bank will cut the cash rate to 2.5% later this month.

Inflation in New Zealand reached 2.5% in the first quarter, slightly above expectations but comfortably within the RBNZ's target range of 1-3% for the third consecutive quarter. The New Zealand dollar remained largely unchanged following the data release and was trading at 0.6001.

Wage growth slowed in the quarter, with the private sector labor cost index excluding overtime rising by just 0.4%, compared to a 0.6% increase in the previous quarter. This softer wage growth is weaker than forecast and suggests that the labor market remains relatively slack.

Participation Rate Drops Amid Tougher Jobs Market

Westpac senior economist Michael Gordon highlighted a marked drop in youth participation in recent quarters, with young people returning to or spending longer in study rather than actively looking for work due to the tougher jobs market. This trend supports the notion that there's excess capacity in the labor market.

The easing of tight labor market conditions and softening in wage pressures support the central bank's easing bias and point towards another 25-basis-point cut in the cash rate when it meets at the end of the month. Markets are wagering rates will drop below 3% before the end of the year, with swaps implying a further three rate cuts for the rest of 2025.

Monetary Easing Ahead

ASB Bank senior economist Mark Smith noted that with inflation within the RBNZ's target range, further monetary easing looks appropriate to support the labor market and New Zealand economy. He expects another 75bps of rate cuts over 2025, which would bring rates down to around 2.25%.

Conclusion

The latest employment data from Statistics New Zealand reinforces expectations for more interest rate cuts later this month and throughout the year. The moderation in labor market growth, combined with wage inflation easing and domestic demand remaining sluggish, suggests that the RBNZ will continue to prioritize supporting economic growth through monetary policy. With inflation within target and excess capacity in the labor market, further rate cuts are likely on the horizon.