Surprise tally points to June rate lift

The number of people employed fell by only 0.1 per cent but the number chasing jobs has surged. Photo / Kenny Rodger

An unexpectedly large jump in the unemployment rate should not been seen as a sign the economy is in much worse shape than was thought, economists said, but it does make it more likely that it will be June before the Reserve Bank starts to raise interest rates.

The December household labour force survey showed signs of stabilisation in the labour market. The number of people employed fell by 2000 or 0.1 per cent, compared with an average of 17,000 jobs lost in the three previous quarters.

But the number of people chasing what jobs there are surged, rising by 18,000.

That pushed the unemployment rate up to 7.3 per cent, the highest for 10 years, and the number of unemployed to 168,000, the highest since 1993.

The jobless - a broader measure which includes those available to work but not actively seeking work, which is a requirement of counting as officially unemployed - rose 23,000 to 276,000.

At 7.3 per cent the unemployment rate was up steeply from 6.5 per cent in September and much higher than the market consensus (6.8 per cent) or Reserve Bank (6.6 per cent) had forecast.

Short-term wholesale interest rates fell on the news. Market pricing now implies it is now more likely than not that the Reserve Bank will leave the official cash rate steady in April, although a rise of at least 25 basis points (to 2.75 per cent) and maybe 50 in June is still priced in.

The NZ dollar dropped more than half a cent against both the US dollar and the Australian.

The surprise was not on the demand side - a 0.1 per cent fall in employment was what the market and the bank had forecast - but on the supply side.

The working-age population (everyone over 15) rose 14,500 in the quarter and 49,000 over the year, boosted by a net migration gain of 21,000.

In addition it has been a feature of the latest recession that the labour force participation rate - the proportion of working age people either employed or actively seeking work - has stayed high.

In previous recessions, the "discouraged worker effect" saw a lot of people withdraw from the labour market, meaning they were out of work but not officially unemployed.

In the December quarter the participation rate rose, from 68 to 68.1 per cent, representing an extra 3400 looking for work.

Bank of New Zealand economist Stephen Toplis said it would be wrong to interpret the data as a sign that the economy's pick-up was weaker than expected.

He expects the December quarter to be the last to record net shedding of jobs.

What the higher unemployment rate did indicate, Toplis said, was more spare capacity in the labour market than the Reserve Bank had expected and a greater disinflationary impact on wages, and that was corroborated by the feeble wage growth reported on Tuesday.

"The combined labour market data this week is at best consistent with the Reserve Bank's view that they don't need to hike rates until June, and conceivably suggests they could delay it even longer."

The BNZ economists, who had been at the gloomier end of forecasts about where unemployment would peak, were sticking to a peak of 7.4 per cent mid-year, he said.

Deutsche Bank chief economist Darren Gibbs said that as the recovery proceeded, employment growth would gradually resume - perhaps in the current quarter, but more so in the June quarter - suggesting the unemployment rate is likely to be close to its peak.

Goldman Sachs JBWere economist Philip Borkin pointed to other signs of weakness in yesterday's data - a 0.4 per cent decline in hours worked in the quarter and a drop of 0.3 per cent in full-time employment - as evidence that the labour market was not yet consistent with the "self-sustaining" recovery the Reserve Bank is looking for.

He said it raised the real possibility the bank would wait even beyond June to begin tightening.