New Zealand Unemployment Hits 5-Year High, Piling Pressure on RBNZ for Rate Cuts

New Zealand’s economic landscape is showing increasing signs of strain, as its unemployment rate surged to a five-year high in the second quarter of 2025. This latest data point underscores a broader deceleration in economic activity, intensifying pressure on policymakers to recalibrate monetary strategy amidst cooling labor market conditions.

• New Zealand’s unemployment rate climbed to 5.2% in Q2 2025, marking its highest level since Q3 2020.
• Total employment experienced a decline of 0.1% quarter-on-quarter and a more significant 0.9% reduction year-on-year.
• The labor force participation rate decreased to 70.5%, its lowest point since early 2021.
• Ordinary time wage growth for non-government workers slowed to 2.2% year-on-year, the ninth consecutive quarter of deceleration.
• The Reserve Bank of New Zealand (RBNZ) is widely expected to cut the Official Cash Rate (OCR) by 25 basis points to 3% at its meeting on August 20.

Labor Market Dynamics Under Pressure

The jobless rate in New Zealand advanced to 5.2% in Q2 2025, an increase from 5.1% in the preceding quarter. This marks the highest unemployment level observed since Q3 2020, signaling a considerable easing in labor demand. Concurrently, total employment experienced a marginal decline of 0.1% quarter-on-quarter and a more pronounced 0.9% reduction year-on-year. This weakening labor market trend emerges alongside other concerning indicators, including sluggish consumer spending, contraction in manufacturing and services sectors, and a subdued housing market, collectively painting a picture of a decelerating economy. Abhijit Surya, a senior economist at Capital Economics, highlighted the underlying slack within the labor market, suggesting the Reserve Bank of New Zealand (RBNZ) is unlikely to overlook these deeper structural issues.

Further analysis of the labor market data reveals a notable reduction in workforce engagement. The labor force participation rate, which captures the proportion of the working-age population either employed or actively seeking work, decreased to 70.5%, down from 70.7% in Q1. This represents the lowest participation level since early 2021. The impact of this economic downturn appears disproportionately felt by younger cohorts, particularly mid-teenagers and young workers. Many in these groups are reportedly opting to return to education or study rather than remain in a challenging job market, as noted by Michael Gordon, senior economist at Westpac in Auckland. This trend contributes to the observed decline in employment and suggests a re-evaluation of post-pandemic labor market participation dynamics.

Wage Growth Trends and Household Impact

Adding to the complexities for households, wage inflation continues its deceleration, marking the ninth consecutive quarter of slowing annual growth. Ordinary time wages for non-government workers increased by just 2.2% year-on-year, a drop from 2.5% in the previous quarter. This trajectory suggests a reduction in workers’ bargaining power, even as households contend with persistently high living costs. However, some nuances exist within the wage data: quarterly wage growth recorded a slight uptick of 0.6%, and average ordinary time hourly earnings for non-government workers saw a robust 1.9% increase from the previous quarter. While this quarterly acceleration might appear encouraging, analysts caution that it could be transient or reflect a shift in employment composition rather than broad-based wage inflation. Businesses may be prioritizing retention of skilled personnel with higher remuneration while concurrently adjusting overall headcount.

Monetary Policy Implications

The latest labor market statistics significantly reinforce market expectations for an impending interest rate cut by the Reserve Bank of New Zealand. The RBNZ had previously forecast a 5.2% unemployment rate for this period but also projected a 0.2% employment growth, a target clearly missed by the current data. With inflation showing signs of moderation and economic expansion faltering, the central bank faces increasing impetus to provide economic stimulus. The consensus among most analysts now points to the RBNZ reducing the Official Cash Rate (OCR) by 25 basis points to 3% at its forthcoming meeting on August 20, particularly following its decision to pause rate adjustments in July.