Unemployment may stay stubbornly at about 6.8 per cent all year, some economists and unionists believe, with the economy flat-lining near recession.
Calls are increasing for the Reserve Bank to cut the official cash rate again.
Most economists expect the OCR and floating home loan rates to stay low till September, rather than rising by June as predicted earlier.
Prime Minister John Key says Kiwis should not lose confidence in the job market despite the unemployment rate rising to 6.8 per cent, or 158,000 people, in the December quarter, from 6.4 per cent the quarter before.
Mr Key said Treasury advice was that unemployment had topped at 7 per cent and 2011 would be a better year, with the Rugby World Cup offering real opportunities for work. "We're seeing an increasing number of jobs being advertised, we're seeing a reduction of people on the unemployment benefit from the high over Christmas."
But some economists think the rate may return to 7 per cent this year, given the weak economy.
Unions said there was a risk of a "jobless recovery". Farmers enjoying high commodity prices may simply pay back debt, while consumers held off spending and firms avoided hiring, the National Distribution Union said. "Many jobs lost in the recession will not be replaced," its general secretary, Robert Reid, said.
He called for a lift in the minimum wage to $15 an hour, the use of New Zealand timber to rebuild in Canterbury, and government job support schemes in sectors such as wood processing.
Deutsche Bank economists said the Reserve Bank should consider reversing last year's 50 basis point interest rate rise to give a greater assurance that a return to growth was close at hand, especially with the Government expected to tighten spending in this year's Budget.
TD Securities research head Annette Beacher said the jobless figure added weight to her view that New Zealand faced another recession. She forecast unemployment to still be 6.8 per cent in a year.
Bank of New Zealand chief economist Tony Alexander said though unemployment was worse than expected, the figure had been bouncing wildly in the past few quarters.
"... we are still hopeful things will improve [this year]," he said, pointing to a lift in job advertising in December.
By 2012 unemployment could be at 5 per cent, though that would partly reflect more people leaving for Australia.
It was still a "50/50 call" if the economy returned to recession when official figures for the December quarter came out. Low retail spending, a fall in home lending and low building consents all pointed to last year ending on a weak note.
The Reserve Bank was likely to hold the OCR till September and unlikely to cut it because the economy would eventually get a lift from quake rebuilding, the World Cup and higher farm incomes.
Westpac still expects a slight lift in the economy in the December figures. "We should escape a second recession, by a whisker," senior economist Dominick Stephens said.
- The Dominion Post
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