Reserve Bank Governor Adrian Orr using the OCR to demolish inflation is one way of softening demand - but the country's problems require more than that, an independent economist says. Graphic / Mark Mitchell, NZME
Reserve Bank Governor Adrian Orr using the OCR to demolish inflation is one way of softening demand - but the country's problems require more than that, an independent economist says. Graphic / Mark Mitchell, NZME
Unemployment is rising and inflation is a tough adversary, but are we looking at the economy and possible fixes in the right way?
“Forget about the next quarter. The issue is over the next two years, and the next five years,” independent economist Cameron Bagrie said.
“In the absence ofsome very significant structural changes across the economy, we’re going to see the unemployment rate move up, and that is the price we are going to have to pay to get rid of inflation.”
The Westpac McDermott Miller employment confidence index on Wednesday was the latest to forecast a rise in unemployment.
This was the first time since early 2021 households had a negative view about conditions in the labour market, and the index’s lowest reading since December 2020.
Bagrie said rising joblessness would create serious social problems and a more divided economy, especially as Māori, Pasifika and youths usually bore the brunt of job losses.
Net migration and the Reserve Bank keeping the official cash rate high were in some cases short-term fixes, but Bagrie said the country was too obsessed with demand, and not focused enough on supply.
Cameron Bagrie says a more nimble, better-trained and more engaged workforce is a better solution to the country's economic challenges than "brutal" attempts to bludgeon demand. Photo / Alex Burton
He said the supply issue would need a more nimble, adaptable workforce, and a better education and training system.
One of the Goldilocks zones is maximum sustainable employment - which the Reserve Bank defined as the level of employment where the job market was tight, but not so tight that inflation rose out of control.
Bagrie said New Zealand was not in the zone.
“We just don’t have the people with the right skills to meet demand.”
He said Kiwis should ask what we could do to make the labour market much more dynamic in order to sustain a lower unemployment rate without provoking runaway inflation.
The best way to do that - and the best predictor of the country’s future - was education, Bagrie said.
NZ Insititute of Economic Research (NZIER) principal economist Christina Leung said the Reserve Bank’s official cash rate was starting to impact consumer spending and confidence, and likely to be more influential in months ahead.
A similar trend was noticed in the US, where the Wall Street Journal this week said consumers seeking loans to buy homes and cars found the Federal Reserve’s rate increases were finally starting to sting.
Leung said lags typified the big forces at work.
When inflation crept up, after a while the Reserve Bank hiked rates.
A while after that, those pressures dampened consumer demand.
And so, a while after that, businesses grew less confident about hiring new staff, because they worried there wasn’t enough consumer demand.
Covid-19 and border closures had complicated matters.
Unemployment in the June quarter was at 3.6 per cent and up 0.2 per cent from the prior quarter, according to Stats NZ.
That increase came about a year after punishing labour shortages caused angst for industries including hospitality and tourism.
Hotel and other sector leaders called for new migrants - and got them. Stats NZ recorded a net migration gain of 96,200 in the year to July 31, an all-time record.
Leung and the NZIER expected unemployment to reach 5 per cent by the end of next year.
The good news might be that joblessness was rising from historic lows, and the Reserve Bank indicated it would not increase interest rates again soon.
Bagrie said New Zealand’s labour force and employment participation rates were still fairly good by OECD standards.
But he worried about interim fixes, saying immigration could work to alleviate the labour crisis, but created challenges for housing and infrastructure in the long run.
“Demand management is brutal... What can we do to make the labour market a lot more dynamic?”
John Weekes is online business editor. He has covered courts, politics, crime and consumer affairs. He rejoined the Herald in 2020, previously working at Stuff and News Corp Australia.
