New Zealand Economic Comment: Q2-26 Labour Market Preview: unemployment rises to cycle high of 5.5%, but RBNZ still to hike

Research evidence excerpt

New Zealand Economic Comment: Q2-26 Labour Market Preview: unemployment rises to cycle high of 5.5%, but RBNZ still to hike

ackdrop of uncertainty from the Middle East

conflict. We expect the participation rate was unchanged at 70.4%, with risks it could

fall. While QSBO 'labour as a limiting factor' continued to rise in Q2-26, indicating an

overall reduction in labour market spare capacity, QSBO employment indicators remain

weak, & filled jobs growth has been modest. There appears to be growing frictional and

structural unemployment in the economy: businesses report it has become more difficult

to find suitable labour despite cycle high unemployment, and UBS estimate that long-

term unemployment (for more than 12 months) has increased to 1.1%, from cycle lows

of 0.3%. With the growth recovery appearing intact despite the Middle East conflict, we

anticipate an unemployment rate of 5.5% in Q2-26 to be the cycle peak, and thereafter

expect a gradual grind lower.

LCI, a wages growth measure, expected to be well-contained at 2% y/y

The Labour Cost Index (LCI) is expected to rise 0.5% q/q, with the y/y to remain at 2.0%,

the equal weakest since Q1-21 and consistent with wage pressures not a key driver of

above-target inflation. Monthly filled jobs earnings is only growing 2.6% y/y over the 3

months to Jun-26, well below its average since 2000 of ~5¾%. However, NZ has an

inflation problem; core inflation and wages growth are contained, & a negative output

gap is still not translating into headline CPI at or below 2.0% y/y.

UBS still expect the RBNZ to hike 25bps in September

UBS still expect the RBNZ to deliver a follow up 25bp hike in September. Upcoming

activity data should signal a further economic recovery, albeit against a backdrop of

inflation that is too high.