The Australian economy is slowing from its break-neck pace of expansion, according to new data, finally giving the Reserve Bank good reason to shelve interest rate hikes.
The latest unemployment data shows more Australians are now out of work, as the central bank squeezes the economy. As the next chart illustrates, the unemployment rate jumped from 3.5% in March to 3.7% in April, seasonally adjusted, confirming the turning point in the labour market has indeed passed. More people were jobless in April than in March, and of the employed, more people had part-time jobs.
The RBA is concerned with keeping the labour market at a level that doesn’t generate runaway wages growth, which further fuels inflation. The rise in unemployment is a sign that its efforts are working. Higher unemployment means less power for workers and more capacity for employers to find staff without hiking pay.
One reason we have an inflation-targeting central bank at all is that macroeconomists understand there is a relationship between unemployment and inflation: you can easily push the former down by pushing the latter up, but inflation is on more of a lag. The RBA acts as a check on a possible government tendency to deliver low unemployment but not worry about the effect on inflation, which might rise after it’s out of office anyway.
That tendency has been theoretical in recent years, with governments tending to leave the unemployment rate at high levels where there was no risk of rising inflation. We moved away from this stagnant scenario for a few glorious months, but now we are moving back towards it. And even with unemployment at 3.5%, there has been no real sign of a wages breakout.
Indeed, the wage price index out this week confirms wages growth is very much under control.
In the past quarter, wages grew just 0.8%. That’s limp — no better than wages growth a decade ago when the economy was barely puttering along amid the European debt crisis. What’s more, back then inflation was much lower meaning wages growth was positive in inflation-adjusted terms. Now it is negative. People who work are getting worse off.
If you account for inflation, it looks far worse.
The upshot is that expectations about what the RBA will do next are changing. Instead of anticipating another rate rise, the experts are now anticipating a pause.
Lower future interest rates mean a lower Australian dollar, and thus AUD fell this week against the US dollar.
The link here is important to understand: global investors would want to move their money here if interest rates were higher, and would need Aussie dollars to invest here. Their buying activity in currency markets would push up the value of the AUD. But instead this week they will move their money away as they expect interest rates to be lower. As they get out of Aussie assets, they sell their Aussie dollars — which causes our currency to fall.
Indeed the RBA relies on this dynamic to help cool the economy. When it hikes rates, our dollar gets stronger, imports get cheaper and we buy more from overseas and less domestically. That reduces shelf prices on imported goods and also draws away customers from domestic firms, discouraging them from raising prices.
If the housing market traded on the stock exchange, it would have probably jumped a fraction of a percentage point when the weaker unemployment data emerged. A lower chance of interest rate hikes is exactly what buyers want to see as they head into the market. If the RBA decides to leave rates on hold for the rest of the year, expect to see the property market bounce back, at least in terms of volumes traded, if not in terms of prices.
The deceleration of the Australian economy is not going to be achieved in a few months. This is a multi-year process. The RBA and Treasury agree that we will see many more lifts in unemployment before the inflation monster is slain. Can the national mood handle it? Only time will tell.
There are SOOO many other ways of taking money out of people’s pockets that would both reduce inflation, not create jobs losses AND be directly beneficial to the individual involved. For instance introduce compulsory personal contributions to super. Takes cash out of the consumption economy, employers can’t whinge because it’s not them paying it & creates long term wealth for individuals. How about legislating compulsory extra mortgage payments? Again the individual doesn’t have as much cash to spend BUT gets a long term benefit. Most people pay extra into their mortgages anyway so no problem. Added bonus, the banks don’t get to gouge us with opportunistic, cynical profiteering during the confusion of rapidly rising interest rates. Okay, so this is a biggie & I can already see the Murdoch media, opposition &, well, everyone really, hyperventilating about it but why not raise taxes? Personal marginal rates, Medicare levy & GST in particular. Again deflationary, no job losses & the government aka ‘we the people’ could actually afford to pay down the coalition’s debt crisis & to run our health system, NDIS, schools, public services, accelerate climate action etc. Yeah, I know, ‘tell ‘im he’s dreamin’.
One of the tools used by Labor in the ’80s was super, i.e. rather than giving a direct pay raise simply increase the SCH super contribution guarantee, then also ensure regulatory compliance by employers for both local and overseas employees.
Another tool is simply not delivering the LNP’s tax cuts (for above median earners), that could also pull in spending and inflation.
Further, looking at recent data from start of ’23 may not indicate a medium to long term trend, but simply ‘noise’ while economy and society gets back to normal after Covid?
‘SCH’ = SCG
Yes, THE 1992 SGC. Instead of pay rises which wage earners should have received, they received half of what they should and in many cases, from 1989-1992, a wage freeze. Especially for federal public servants. Labor was going to increase the SGC in the late 1990s but the government was going to contribute a portion (1-3% on a sliding scale) and the employee was going to do the same. So any increases in super Labor had planned for the 1990s had they won in 1996 were going to come from taxpayers and employees themselves in large measure. Hardly fair and a further denial of a wage increase. Secondly, the regulatory compliance regime you speak of was very weak for payment of the SGC. Hell, Dept of Labour and Industry inspectors couldn’t even cover the territory they had to administer in the ordinary course of ordinary, run of the mill workplace breaches like safety, environmental protection and other workplace disputes let alone the Brave New World of compliance with the newly minted SGC. Labor’s SGC was their way of stimulating the share market rather than the pay packets of wage earners. I remember this. The Jobless Recovery – 1990-1996. Labor is repeating Hawke and Keating’s fallacy. I think Rudd and Gillard are looking better by the minute.
Im getting a bit angry that the apparent solution to inflation is to screw the most vulnerable people in the country. Whatever low income earners have they need to spend. If they have less then important expenditure doesnt happen, like on rent, food or medicine. Maybe their expebiture is inflationary but it must happen. The wealthy on the other hand dont have to spend every cent to meet their needs. Only some of their expenditure is inflationary. Certainly not their savings. So how about we come up with a strategy to raise taxes from the wealthy and be a bit more humane to the strugglers.
Ditch stage 3 for starters.
Simple answer. Short answer. NO! They are addicted to high interest rates and are bereft of any other function or form of advice. I notice they waited until there was a Labor government before they embarked on this path. No such move under the conservatives. Lowe always has a smirk on his face whenever he is inflicting pain on tens of thousands of mortgagees. It is as though he is gaining sadistic pleasure from all this pain. I wonder why he wasn’t asked why he didn’t do some of this when the Libs were in office? NZ raised their’s before us. So did the US and the UK. The RBA is a political tool of the conservatives and cannot be trusted. They should be abolished forthwith.
The RBA want unemployment to skyrocket. I can only guess that their worthier ulterior motive would be that rising interest rates would discourage the money markets and investors from simply parking safe money in US Treasury bonds. With higher official interest rates, Australia has a chance of securing some money market investment otherwise our dollar would collapse and our inflation skyrocket similarly. I notice that Lowe has never used this argument before. I cannot understand why our dollar is so weak given higher resources prices. This wasn’t the case until very recently. It was A$1:US$1.06 at one stage. What happened? Even at 74-75c this was acceptable but to be trading at US67c is odd. Just because the US puts it’s interest rates up. I can only surmise what will happen if they collapse again. Geez I hope we find gold again.