May 8 (Bloomberg) -- New Zealand's employment fell by the most in 19 years in the first quarter as plunging business confidence prompted companies to fire workers, adding to signs economic growth has stalled.

The unemployment rate increased to 3.6 percent from 3.4 percent in the previous three months, Statistics New Zealand said in Wellington today, citing seasonally adjusted figures. Employers shed 28,000 workers in the quarter, more than 10 times the decline expected by economists.

Reserve Bank Governor Alan Bollard last month cited the strength in the labor market as a source of inflation and a reason for leaving the official cash rate at a record high of 8.25 percent. New Zealand's dollar fell to a three-month low after today's report as traders bet Bollard will cut interest rates this year as the economy risks falling into a recession.

``There is a strong likelihood the economy contracted in the first quarter,'' said Khoon Goh, senor economist at ANZ National Bank Ltd. in Wellington. The central bank may cut interest rates ``as early as June.''

New Zealand's dollar fell as low as 77.10 U.S. cents from 78.22 cents immediately before the report. It bought 77.22 cents at 5:05 p.m. in Wellington. The yield on a three-month bank-bill futures contract maturing in December slumped 30 basis points to 7.8 percent. A basis point is 0.01 percentage point.

Recession Risk

Finance Minister Michael Cullen said in March he couldn't rule out the possibility of a recession this year. Bollard may cut interest by Sept. 30, according to eight of 13 economists surveyed today by Bloomberg News. Five analysts brought forward their forecasts after today's report.

The jobless rate was the sixth-lowest of 27 economies in the Organization for Economic Cooperation and Development that use standardized rates, the statistics bureau said. The median estimate of 12 economists surveyed by Bloomberg News was for an unemployment rate of 3.5 percent and the loss of 2,150 jobs.

Business confidence slumped to a 33-year low in the first quarter, according to a survey by the New Zealand Institute of Economic Research. Twenty percent of firms said they may fire workers in the second quarter as costs rise and profits fall.

Wages for non-government workers rose 0.7 percent in the first quarter, less than the 0.9 percent pace forecast by economists, the statistics agency reported on May 5.

Economic Growth

Slowing wage growth and rising unemployment is eroding consumer confidence, which was at a 10-year low in the first quarter, suggesting households are likely to stop spending and economic growth will weaken.

Growth will be 1.5 percent in 2008, the slowest pace in a decade, according to the median forecast of 10 economists surveyed by Bloomberg. Growth was 3.1 percent in 2007.

About half the drop in jobs was in the retail industry, the statistics agency said, citing unadjusted figures.

Briscoe Group Ltd., an Auckland-based sports goods and home-ware retailer, said yesterday first-half profit may fall 50 percent as spending slows. The company is ``battening down the hatches,'' Managing Director Rod Duke said.

To be sure, New Zealand's jobless rate rose from a record low in the fourth quarter and is still among the lowest in the Asia-Pacific region. It compares with 4.1 percent in Australia, 3.8 percent in Japan and 4 percent in China.

U.S. Challenge

Governor Bollard, who raised interest rates four times between March and July 2007, said last month inflation will remain higher than his 1 percent-to-3 percent target this year. Borrowing costs needed to stay high ``for some time'' to ensure inflation returns to his target, he said.

Like central bankers across Asia and Europe, Bollard faces the challenge of managing fallout from a looming U.S. recession and slumping financial markets against signs that rising commodity prices are stoking inflation.

Consumer prices surged 3.4 percent in the first quarter from a year earlier, exceeding Bollard's target, as fuel and food costs increased.

Employment fell 1.3 percent from the fourth quarter, the most since the first quarter of 1989, today's report showed. Employment dropped 0.2 percent from a year earlier, the first annual decline since 1998.

The median estimate of economists was for a 0.1 percent decline in the quarter for an annual increase of 1.3 percent.

The participation rate, which measures the proportion of the population working or seeking employment, slumped to 67.7 percent from 68.6 percent in the fourth quarter.

Total actual hours worked fell 1.9 percent from the fourth quarter and dropped 1.6 percent from a year earlier, the biggest annual decline since 1991.

To contact the reporter on this story: Tracy Withers in Wellington at twithers@bloomberg.net.

Last Updated: May 8, 2008 01:17 EDT