50,000 people may need to lose their jobs to bring inflation under control


Nearly 50,000 people may have to lose their jobs before the Reserve Bank Te Pūtea Matua can bring inflation under control.

Economists at the Financial Services Council conference in Auckland on Wednesday followed an upbeat presentation by Treasury Secretary Grant Robertson with a rather ominous panel assessment of the next 12 months for the economy.

Robertson said he didn’t want people to talk themselves into negative vibes and told delegates there was “every reason to be optimistic” for the year ahead.

But the economists who followed him on the conference podium struck a less optimistic note, saying unemployment may need to rise from 3.3% to 5% before inflation is back within the central bank’s 1% to 3% target range .

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“The Reserve Bank issued a 5% forecast in its latest monetary policy statement,” said Sharon Zollner, chief economist at ANZ.

“It’s perfectly reasonable to interpret this as their best guess at what they think they need to see,” she said.

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Mark Lister, Head of Private Wealth at Craigs Investment Partners, said: “Central banks are sailing the ship right now, aren’t they? I think the prospects depend a lot on how they work.”

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However, household spending has fallen as Kiwis tighten their belts.

But he said, “Going up to 5% from 3.3% in the March quarter is quite a big move.”

The unemployment rate of 3.3% in the June quarter represented 96,000 people, data from Stats NZ shows.

In December 2020, when the unemployment rate was 4.9%, the number of unemployed was 141,000.

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An unemployment rate of 5% is still low in historical context, Lister said.

But Zollner said the rise would be just as rapid a rise in unemployment as it was when the global financial crisis (GFC) hit.

There was a risk that the Reserve Bank’s measures could push up unemployment.

Zollner said ANZ now expects the Reserve Bank to raise the official cash rate (OCR) from the current 3% to 4.75% by the end of May next year.

Economists were unsure if the country would avoid a technical recession with two quarters of negative growth.

Sharon Zollner, chief economist at ANZ, says the Reserve Bank needs some people to lose their jobs to curb inflation.

LAWRENCE SMITH/witness

Sharon Zollner, chief economist at ANZ, says the Reserve Bank needs some people to lose their jobs to curb inflation.

Zollner said the definition was not the public’s idea of ​​a recession.

“For the person on the street, they define recession in terms of employment,” she said.

The current job market is “very, very tight,” she said, and bringing down inflation requires “some spare capacity” in the job market.

It’s difficult for the Reserve Bank to talk about, she said.

“It’s difficult for them to talk about it. To defeat inflation, they require some people to lose their jobs. It’s a challenge for communication,” she said.

Unemployment hasn’t been this low since the 1980s, Lister said.

“You must cause pain. They have to create some unemployment,” he said.

Rising unemployment meant avoiding a recession would be difficult, he said.

“It’s going to be quite difficult to contain inflation without creating hardship,” said economist Eric Crampton of the New Zealand Initiative.

Economist Eric Crampton is Research Director at The New Zealand Initiative.  He says the government's

Cameron Burnell/Stuff

Economist Eric Crampton is Research Director at The New Zealand Initiative. He says the government’s “deficit spending” hasn’t made it easy for the Reserve Bank to bring down inflation.

The Reserve Bank’s job in bringing down inflation is to fight the inflationary effects of high government spending, he said.

“They are spending big, positive fiscal stimulus, deficit spending while the economy is insanely overheated. It doesn’t make the Reserve Bank’s job any easier,” he said.

Labor market statistics track this capacity not only in unemployment figures. They also track the rate of “underutilization”.

This is a combination of the unemployment rate and people who work part-time but want to work more, as well as a handful of people who are job hunting but won’t be able to start until next month.

The slack rate for the June quarter was 9.2%, or 276,000 underutilized workers.

The last time the unemployment rate was close to 5% was in the December quarter of 2020. It ended the quarter at 4.9%.

Back then, underutilization was 11.9%

Different social groups experience job losses to different extents.

When unemployment was 4.9%, the unemployment rate for Māori was 9.1%, compared to 3.7% for Pākeha.

The same pattern was seen in the slack rate, which was 19.4% for Māori and 10.8% for New Zealand Europeans.



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