KEY POINTS:
Economists are predicting unemployment to double to between 6 and 7 per cent if the international credit crunch turns critical here.
ANZ chief economist Cameron Bagrie predicts that, at best, the unemployment level will increase from 3.4 to 5 per cent as tightening credit conditions hamper economic growth.
If the credit crunch grips New Zealand, "The economy will tip into recession, it'll be a deep one, and the unemployment rate will move up very aggressively".
Westpac chief economist Brendan O'Donovan says there is a "real risk" of an imminent credit crunch facing the economy. "These are extremely fragile and uncertain times, and the threat is a near-term risk."
A rise to 5 per cent unemployment will be "a reasonably orderly economic adjustment", Bagrie says.
"If we get a disorderly credit adjustment, all bets are off - the unemployment rate will be way higher than 5 per cent."
Unemployment of 5 per cent equates to 38,000 fewer jobs, although this takes into account natural growth in the available labour force and not just jobs being lost.
The unemployment rise will be significantly higher than the 10,000 to 20,000 jobs lost in the last slowdown of 1997/98, which saw a 1.5 per cent increase in the unemployment rate from 6 to 7.5 per cent.
Rising unemployment could be seen quickly - as soon as this June.
"I think the unemployment rate is going to move pretty sharply in the second half of the year," Bagrie says, "primarily because I think the growth picture here is deteriorating sharply. We shouldn't kid ourselves here. The unemployment rate is moving back up, it's called a business cycle."
Those sectors that do very well at the top of the economic cycle become most vulnerable when the cycle goes the other way.
Sixty per cent of New Zealand's jobs growth over the past five years has been directly or indirectly exposed to the property market. With house sales down 40 per cent on a year ago, industries connected to the property sector will be the first and predominant ones hit - and they won't see improvement as long as the tightened credit environment keeps house prices under pressure.
The good news, Bagrie says, is if the unemployment rate peaks at 5 per cent, that's still historically low.
The tightened credit environment has hit all nations, he says. The American economy has been the first to turn in the credit cycle, followed by the UK.
New Zealand will be third, Bagrie says, followed by Australia. This is because all these countries have benefited from easy access to credit, which has inflated asset (housing) values, but left each of them vulnerable when asset prices start to fall - as is happening now.
The bottom line is these countries run current account deficits - they don't save enough - and so they all will be penalised by the rising cost of sourcing credit.
At this stage only the US has seen rising unemployment. However, strong commodity prices are merely deferring the inevitable flow-on to New Zealand and Australia, says Bagrie, with New Zealand and the UK looking set to follow that labour market trend as growth slows.
With no growth expected in the economy for the first nine months of the year, headline lay-offs have begun, such as the recent large-scale losses facing workers at Carter Holt Harvey's Kopu sawmill and Fisher & Paykel's Dunedin manufacturing plant. Bagrie says structural changes are set to continue over the next two years.
Council of Trade Unions economist Peter Conway says the high dollar is still hurting manufacturing to the detriment of employment in the sector. However there are still skill shortages in industries such as dairy, health, education and some high-skill areas, with pockets of the country like Southland crying out for staff.
Part of the problem for New Zealand, says Bagrie, is shifting resources from certain areas to others.
FUTURE PROOFING YOUR POSITION
Advice for employers: Try to ensure wage growth is productivity driven so your competitiveness isn't hurt; retain good workers.
Advice for employees: Rein in consumption and discretionary spending - live within your means; don't over commit financially - get advice.
WHAT'S HAPPENING IN THE INDUSTRIES?
The quick downturn in the property market means real estate agents, mortgage brokers, conveyancers, valuers and others who fed off the boom are already seeing job losses.
Barfoot & Thompson director Peter Thompson says 30 of its 1200 real estate salespeople have left and not been replaced in the past two months, and he expects the company to shed more in the next two months. "A third wouldn't be out of the question."
Even top salespeople are affected, says Thompson. While they had good incomes during the boom, some overcommitted themselves and now need to take jobs with regular income. Thompson will not disclose what top salespeople earn, but says average earnings are $30,000-$50,000 a year.
Mortgage Brokers Association chairman Geoff Bawden says there's no question about the impact of the house market slowdown on the volumes brokers are writing, with newcomers particularly feeling the pain.
Tim Jones, property partner at Auckland city law firm Glaister Ennor, confirms a reducing number of conveyancing transactions generally, which at his firm, for example, has prompted some lawyers to head overseas - with the firm opting not to replace them.
Firms are either redeploying property lawyers to other types of practice, or making them redundant, says Jones. "We're yet to see the full backlash of redundancies," he says, picking June or July as the point at which it will really bite. Suburban firms and those in smaller centres, such as Hamilton with a heavy reliance on "mum-and-dad" conveyancing work, are hurting first and worst.
Also, with the recent disappearance of 17 mortgage lenders, he says developer clients are thinking twice about new developments, meaning less consents work for local authorities and their lawyers.
Westpac's Brendan O'Donovan expects residential construction activity to contract almost 7 per cent this year and a further 4 per cent next year.
Pockets of the economy that leverage off the property market, such as business support services and the retailing sector will be affected next, says ANZ's Cameron Bagrie.