Pain ahead for workers as companies cut jobs to 'tighten their belts'

Friday, 27 January 2023

The World Bank warns the global economy is on a “razor’s edge”.

Barely a month into the new year and already big job cuts are on the cards as companies like The Warehouse Group and MediaWorks tighten their belts ahead of a looming recession – unemployment is heading higher.

The economy is expected to slip into recession this year as the Reserve Bank hikes interest rates to combat high inflation. Economists say that will see the unemployment rate lift off record low levels from about the middle of this year and peak late next year.

“We are getting to a turning point in the economy,” says Westpac acting chief economist Michael Gordon. “We are going to see the effects of higher interest rates clamping down on economic activity, and that will inevitably flow through to higher unemployment.

“Because the economy ended up as overheated as it was, the adjustment is going to be painful for some people.”

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Westpac acting chief economist Michael Gordon says the economic adjustment is going to be painful for some people.

Last week, The Warehouse Group, one of the country’s largest retailers, told staff it plans to cut 190 jobs at its Auckland support offices as it responds to “challenging market conditions” after weaker trading during its key Christmas period.

MediaWorks, which owns about half the country’s commercial radio stations, said it intends cutting up to 90 jobs in an effort to trim costs. Chief executive Cam Wallace told staff about two-thirds of the company's costs were labour related and the impact of inflationary pressures and a likely recession this year meant costs must be reduced.

Westpac’s Gordon notes that a lot of the turnover in the labour market is invisible as the country is dominated by small businesses and a couple of jobs disappearing from hundreds or thousands of small businesses is not going to end up in the news.

Unemployment is set to rise this year as companies respond to an economic slowdown. (File photo)

“Announcements by larger companies are sometimes a signal of what's going on more generally, but they're not really going to capture the full picture. It's only ever going to be a fraction of what's going on in total.”

The latest unemployment figures for the final three months of last year are due out on Wednesday. Economists expect the rate will remain at 3.3%, having hovered at or near a record low 3.2% for the past 18 months.

“That seems like a reasonably convincing sign that we've hit the wall in terms of reaching full employment,” Gordon says. “The trend is turning towards a weaker economy, and unemployment heading higher over time.”

Westpac sees the unemployment rate peaking at 4.8% at the end of next year. Kiwibank expects the rate to lift from the middle of this year to peak around 5% or 5.5% next year.

A slew of data is already signalling weakness. Job advertisements, seen as a key indicator for what’s to come, have started to decline, while business opinion surveys by the NZ Institute of Economic Research and ANZ show firms are now looking to cut, rather than add, jobs.

In the case of MediaWorks, the jobs to be axed include roles that are vacant at present.

“That may end up being a microcosm of what we see in the broader economy,” says Gordon. “As activity starts to cool, we may see employers realise that they didn't need to fill that position after all.”

He’s quick to point out that job advertisements are not low, they’ve just pulled back from their highs and are back around pre-Covid levels.

New Zealand isn’t the only country where companies are downsizing their workforces after the pandemic as the economic outlook weakens.

Last week, music streaming service Spotify announced it was cutting 6% of its global workforce, or about 600 jobs. Chief executive Daniel Ek told staff on Monday that employee numbers needed to be reduced to bring the company’s costs more in line.

That followed announcements earlier this month from other big tech companies like Amazon, Microsoft and Google for tens of thousands of job cuts as the economic boom that the industry rode during the Covid-19 pandemic waned.

“Worldwide, we are starting to see some job cuts,” says Hamilton Hindin Greene investment adviser Mark Hampton. “Certainly a theme does seem to be companies tightening the belt.”

Reserve Bank governor Adrian Orr admitted to a select committee in November that the bank was deliberately engineering a recession to rein back inflation after being slow to raise interest rates.

“It's not surprising that we're starting to see this,” says Hampton. “This is what is being designed to happen. But it certainly wouldn't make it any easier on the people who are facing the prospect.”