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Real wages set to fall amid rising prices, extended unemployment: economists

Tuesday 23rd March 2010

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Real wages are set to fall over the coming year as rising prices and extended unemployment keep the labour market subdued, economists say.  

The value of wages will decline 0.5% in the 12 months through March 2011 as inflation exceeds salary growth, while unemployment remains elevated, according to the New Zealand Institute of Economic Research’s consensus forecast of ten financial and economic agencies.  Wages are expected to grow 1.9% this year, down from 2.2% in the previous survey, and lagging behind the expected inflation 2.4% for the same period, up from a forecast 2.1% in the December survey. 

“Real wages are likely to decline to March 2011 and remain flat through March 2012, which may dampen a recovery in household spending,” said economist Peter O’Connor in his report. “A subdued economic recovery means the unemployment rate is expected to remain elevated in the forecast horizon.” 

Unemployment hit a 17-year high at 168,000 at the end of last year, sapping optimism over New Zealand’s economic recovery as it climbed out of the worst recession since the 1990s.  

The economists predict the annual unemployment rate will peak at 7.2% in the year through March 2010, up from 7% in the previous survey, before gradually declining to 6.2% by 2012.

O’Connor said this was still higher than the “sub 4% levels through much of 2005 to 2008” and would probably cap wage growth.  

Still, the survey was slightly more bullish about the economy’s prospects, with the outlook for annual gross domestic product growth up to 3.1% from last survey’s 2.8% for the 12 months through March next year. The forecast for the year ended March this year remained unchanged at a 0.4% annual contraction.  

New Zealand’s GDP probably grew 0.8% in the three months ended December 31 when data is released on Thursday, according to a Reuters survey.  


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