Labour market figures to be released this week will likely show unemployment levels largely unchanged, but economists and the Reserve Bank are still expecting 'slack' to start emerging in the labour force as the year goes on

It might be the beginning of the end for raging hot labour market conditions with the release this week of the latest unemployment and wage figures.

But then again, everybody's been expecting for some time that the labour market will cool - and certainly the Reserve Bank's wanting that to happen - but the labour market has not been playing ball.

Our economy is still adding jobs, as Stats NZ's latest employment indicator for March shows.

The RBNZ is expecting that unemployment will rise very slightly to (a still very low) 3.5% for the March quarter from 3.4% (as of December) when Stats NZ releases the figures on Wednesday. But the central bank's then expected the pace of unemployment will pick up considerably as the year goes and, with it tipping the rate to be 4.8% by the end of this calendar year.

A symptom of the hot labour market and shortages of available staff has been rising wages, with private sector ordinary time hourly wages increasing 8.1% in the year to December. The RBNZ thinks the pace of the wage rises will slow to 7.6% as at the end of the March quarter.

Essentially, the RBNZ needs some slack to develop in the workforce to take heat out of the economy and assist its drive to get inflation back into the targeted 1% to 3% range.

While inflation as measured by the Consumers Price Index (CPI) did ease back to an annual rate of 6.7% in the March quarter from 7.2% as of the December quarter, a rate of 6.7% is still a long way from 1% to 3%.

The RBNZ for its part has been willingly brandishing its weapon of choice, the Official Cash Rate (OCR), having aggressively ramped it up from just 0.25% at the start of October 2021 to 5.25% as of last month, with general expectations in the market that there will be another 25 basis point rise this month, taking the OCR to a 'terminal' setting of 5.5%.

One thing that will be starting to help the RBNZ in terms of taking pressure off the labour market is the fact that inbound migration has accelerated very quickly from the standing start of closed borders during the pandemic. These are migrants that are now filling jobs that employers have struggled to fill.

According to the Ministry of Business Innovation and Employment (MBIE), 20,442 people arrived in NZ on work visas in March this year - which is higher than the numbers that were coming in before the borders were closed.

In terms of what the 'market' is expecting from the labour market figures this week, BNZ senior economist Craig Ebert says "market expectations" have gravitated to average expectation of a 0.5% increase in first quarter employment (1.8% year-on-year), the 'participation' rate edging up to 71.8%, from the December quarter's record high of 71.7%, and an unemployment rate of 3.5%.

The BNZ economists actually think the unemployment rate will stay at 3.4%, however, while they are picking first quarter employment growth of 0.4%.

Ebert notes reports from businesses are that it’s becoming less difficult to get and retain staff, "consistent with the burgeoning inward migration data of late".

"So, we are going to leave that at the 3.4% level we had on the board, so still steady from Q4’s 3.4% (based on a participation rate of 71.8%). We judge risks as skewed to an even higher number on Q1 employment but more two-sided with respect to the unemployment rate – could be higher but could just as easily be lower."

ANZ's economists reckon unemployment's going to fall again - to 3.3% - while employment may grow by 0.5% in the quarter.

Chief economist Sharon Zollner and economist Henry Russell say while signs of a slowing domestic demand "have undoubtedly emerged in recent months", they aren’t expecting to see these manifest as yet to any great degree in the labour market, which remains very tight.

And the ANZ economists expect average ordinary time hourly wages in the private sector will have increased at an annual rate of 8.3% as of the March quarter.

"Although we expect a solid labour market report in Q1, it may be something of a 'last hurrah'," the Zollner and Russell say.

"With the RBNZ getting traction, we expect one further 25 [basis point] increase to the OCR [Official Cash Rate] on May 24 before a pause to 'watch, worry and wait'. Labour market tightness is a key input to the inflation outlook but the RBNZ’s decision will also be contingent on the outlook for fiscal policy released at Budget 2023 on  May 18."