New Zealand's Job Market Softens: ANZ Forecasts Unemployment Rise in Q1

The Reserve Bank of New Zealand (RBNZ) has been walking a tightrope for months, balancing high interest rates with a cooling economy. Now, ANZ Research has added another layer of caution: it expects the unemployment rate to climb 0.2 percentage points to 5.3% in Q1 2025, marking a sustained softening of the labor market. This projection, based on weakening demand for labor and a shrinking labor force, underscores risks to consumer spending and corporate earnings—and investors should take note.

The Data Behind the Downturn

New Zealand’s unemployment rate hit 5.1% in Q4 2024, the highest since early 2021, according to Statistics New Zealand. This represents a sharp reversal from the post-pandemic labor shortage that saw rates dip to 3.2% in late 2022. Key drivers of the rise include:
- A 0.9% annual drop in labor force participation to 71.0%, as 57,000 more people exited the workforce since 2023, citing retirement, study, or health issues.
- A 1.7% year-on-year decline in the employment rate to 67.4%, with 45,700 fewer employed workers by September 2024.
- Wage growth slowing to 3.3% annually (from 3.8% in Q3), signaling weaker demand for labor.

The NZX 50 index has underperformed global equities this year, down 5.2% in local currency terms, as investors price in these macroeconomic headwinds.

Why This Matters for Investors

The unemployment rise poses dual risks:
1. Consumer Spending: With 33,000 more jobless workers since late 2023, households face reduced income, squeezing discretionary spending. Retail and travel stocks—already pressured by high interest rates—may feel further strain.
2. Corporate Margins: Slower wage growth eases labor cost pressures, but companies in sectors like construction and hospitality, which rely on consumer demand, could see weaker revenue growth.

Conversely, the data strengthens the case for the RBNZ to pause interest rate hikes, which currently stand at 5.75%—the highest since 2008. A pause could stabilize the NZD and ease borrowing costs for businesses, though inflation risks remain.

Navigating the Landscape

Investors should consider:
- Dividend-paying sectors: Utilities and telecoms (e.g., Spark New Zealand NZX:SPK) may offer stability amid economic uncertainty.
- Export-driven firms: Companies like Fonterra NZX:FNC (dairy exporter) could benefit from a weaker NZD, though global commodity prices remain a wildcard.
- Interest rate-sensitive assets: Bonds and mortgage REITs may gain traction if the RBNZ’s tightening cycle ends soon.

Conclusion: A Cautionary Turn

ANZ’s forecast of a 5.3% unemployment rate in Q1 2025 aligns with structural shifts in New Zealand’s labor market. With participation waning and job creation slowing, the economy is entering a phase where full employment is a distant memory. While the RBNZ’s policy flexibility offers some relief, investors must prepare for a prolonged period of moderation in growth and earnings. The path forward hinges on whether the job market’s softening can stabilize without triggering a deeper slowdown—and that’s a question even the best data can’t yet answer.

Data sources: Statistics New Zealand, ANZ Research, RBNZ monetary policy statements.