New Zealand Jobless Rate Drops to Record Low on Labor Shortage

(Bloomberg) -- New Zealand's unemployment rate fell to a record low in the fourth quarter amid a labor shortage, adding to signs the economy is overheating.

The jobless rate dropped to 3.2% from a revised 3.3% in the third quarter, the lowest since records began in 1986, Statistics New Zealand data showed Wednesday in Wellington. Economists expected 3.3%. Still, employment growth failed to meet expectations, rising just 0.1% from the previous three months.

New Zealand's closed border has cut the supply of imported labor, creating worker shortages that are driving up wages and contributing to the fastest inflation in more than 31 years. The Reserve Bank began raising its official cash rate in the fourth quarter and economists are forecasting the benchmark may need to be aggressively increased to take stimulus out of the economy.

“We expect the labor market to tighten further and for wage inflation to accelerate over 2022,” said Mark Smith, senior economist at ASB Bank in Auckland. “We have changed our OCR call in light of the tight labor market and high medium-term inflation outlook.”

ASB now sees the cash rate rising to 2.75% by early 2023, up from its earlier projection of 2%. Last week ANZ Bank New Zealand raised its forecast peak for the OCR to 3% from 2%.

Investors have fully priced in a 25 basis-point rate hike at the RBNZ's next policy meeting on Feb. 23 and there is a 25% chance of a 50-point move, swaps data show.

The kiwi dollar was little changed after the jobless report. It bought 66.36 U.S. cents at noon in Wellington.

Inflation Surge

Inflation surged to an annual rate of 5.9% in the fourth quarter, well above the 1-3% band targeted by the RBNZ. While an outbreak of the highly infectious omicron variant of Covid-19 could damp economic growth, it might also add to capacity pressures through worker illness and further supply chain disruption.

Annual employment growth was 3.7% against economists' median forecast of 3.8%. While the 0.1% quarterly gain in employment was short of the 0.4% expectation, it has risen for five straight quarters and surged 1.9% in the three months through September, the most in four years.

The participation rate was little changed at 71.1% from 71.2% in the three months through September.

Statistics New Zealand said the underutilization rate, which is a broader gauge that includes employed persons seeking additional hours, was 9.2%, unchanged from the third quarter.

Ordinary time wages for non-government workers rose 0.7% in the quarter, the statistics agency said. Economists expected 0.9%. From a year earlier, wage growth was 2.8%, up from 2.5% in the 12 months through September.