The question isn’t whether the economy is recovering, it is what it is recovering to
Wednesday, 4 February 2026
ANALYSIS: The fresh figures published by Stats NZ on Wednesday that show official unemployment edged up to a 10-year high of 5.4% at the end of last year aren’t as bad as they seem — as many economists have begun pointing out.
The rise was due to an extra 19,000 people looking for work, rather than there being any fewer people in jobs (the number of people in employment actually rose by 15,000).
But it does mean that the 165,000 Kiwis now available and looking for work face more competition for opportunities.
And along with the rise in inflation to 3.1% in the December quarter, the higher headline unemployment number clearly complicates the Government’s task of persuading voters it is charting the right course on the economy.
Read more:
Unemployment rises to 5.4%, but there are some silver-linings
Nicola Willis says unemployment better than predicted, blasts ‘glass half empty economics’
Labour finance spokesperson Barbara Edmonds was quick to twist the knife.
“Christopher Luxon promised to fix the economy, but things are getting worse,” she said. “Every day this government continues on its current path, more New Zealanders fall behind.”
Finance Minister Nicola Willis was left with the trickier task of selling the “underlying details” of the labour market figures as positive.
That is often the way the political cookie crumbles.
On August 6, Willis characterised a smaller-than-expected rise in the unemployment rate to 5.2% as positive, even though that was because of a steep drop in the labour participation rate and the underlying trend was fairly bleak.
“I do expect that unemployment will be coming down later this year,” she also said that day — we now know over-optimistically.
Overall the latest labour market figures might be described as OK, but no cause for celebration.
The big picture is that there does still seem to be a cyclical recovery taking place — as would be expected given the Official Cash Rate is now well below the rate of inflation — but there are still questions over the strength of that recovery and how long it may last.
Essentially, the question is: what exactly are we recovering to?
It is impossible to tell how much spare capacity there is in the economy and how it could be performing if it was firing on cylinders, when it isn’t firing on all cylinders.
But the rise in inflation, and the fact some employers are already starting to complain about difficulties finding skilled staff, suggest the ceiling on economic activity may be lower than assumed.
These thoughts have clearly been troubling BNZ.
One reason for inflation being more elevated than expected at this point of the economic cycle would be if “potential growth” in economic activity was lower than supposed, BNZ economist Doug Steel notes.
“It is difficult to know in real time. But things like very low net migration, energy market challenges, and low investment have been obvious headwinds to potential growth over recent times.”
The lack of any strong tailwinds may be as much of a problem.