Despite the cost-of-living crisis now taking a significant toll on consumer’s pockets, New Zealand’s labour market remains strong, with the unemployment rate at a relatively low 4.0% for December 2023.

From mid-2021, the country experienced acute labour shortages nationwide, limiting business services and output. These labour shortages were well publicised and broad based, spanning across lower wage roles (hospitality, retail), essential services (transport, healthcare) and specialist industries (IT, manufacturing).

The Milford Private Markets team invests directly into private companies across a range of sectors, working closely with our investee companies at both the board and senior management level to help them achieve their growth plans. We have, therefore, seen first-hand the impact of the tight labour market across numerous sectors in the economy.

During this period of acute labour shortages, many of our private equity portfolio companies experienced difficulty hiring staff. These companies were often forced to reduce output, run reduced services, and ultimately paid significantly higher wages to retain staff.

However, in the past 6 – 9 months, we have noticed a marked shift in the labour market. We are seeing a significant number of applications for roles within our portfolio companies, making it easier to fill roles such as truck drivers, hospitality staff and fruit pickers/packers. In some areas we are seeing upwards of 500 applications for roles that were previously difficult to fill.

However, not all sectors are benefitting from the easing labour market. At New Shoots, an early childhood education business, we continue to have difficulty hiring teachers for our centres.

A meaningful driver of the easing labour market conditions has been the significant uptick in net migration over the past 12 months. Provisional estimates for the 12-months to November 2023 show net migration of 127,400 people – the largest inflow ever recorded and adding much-needed capacity to the workforce.

Whilst the unemployment rate has steadily risen from 3.4% in March 2023, the latest 4.0% unemployment rate figure for December 2023 released recently came in below our (and the market’s) expectations, given the anecdotal evidence we’re experiencing.

This will be an important data point for the Reserve Bank of New Zealand (RBNZ) to understand as it considers interest rate changes this year. High immigration adds to demand in the economy, which is typically inflationary. However, in a significantly labour-constrained environment, high net migration can have the opposite effect, taking staffing pressure off businesses and cooling wage inflation.

The key question is whether the RBNZ sees the current level of unemployment as inflationary, and keeps rates high (or even increases them) to curb inflation. Or is there still a possibility for the New Zealand economy to navigate a path like we’re seeing in the USA, where employment has remained strong while inflation falls? There is risk that the better-than-expected unemployment data is masking the weakness in the NZ economy, and further rate hikes by the RBNZ could seriously hurt an already struggling consumer. These “crystal ball” questions will set the tone for both businesses and consumers for the year ahead.