Unemployment Is Now the Key Variable that will Determine Australia’s Economic Outlook

The unemployment rate remains a key piece of economic data in the RBA’s decision-making process with regards to interest rates.  However, in recent months the RBA has formed the view an unemployment rate of close to 4.5% (the Non-Accelerating Inflation Rate of Unemployment – NAIRU) as opposed to 5.0% will be necessary to exert upward pressure on wages.  The RBA now considers the current rate of unemployment above 5% is unlikely to cause wage pressures in the near term. 

The RBA is also watching the employment figures to see if unemployment is likely to become a problem (either for household spending and GDP growth) due to a rising unemployment rate and lack of jobs growth, or potentially for the housing market as historically mortgage holders losing their jobs and being unable to meet their mortgage payments has been the largest cause of mortgage defaults.  Historical data suggests that while households may struggle with large mortgage payments it is only when they lose their source of income that actual defaults occur.

In May, there was yet again strong employment growth, with 2,400 new full-time and 39,800 part-time positions being created (against a forecast of 16,000 total new positions).  However the unemployment rate remained at 5.2% because yet again the participation rate increased to a new record of 66.0% meaning that a combination of population growth and a greater proportion of the working age population seeking work meant that of the 42,200 new jobs created the number of unemployed persons fell by only 2,400 and so the unemployment rate was unchanged at 5.2%.  In most other contexts, these unemployment figures would be viewed as highly desirable; however, the economic focus is currently very much on wages growth and other measures to increase consumer spending to support GDP growth and with the new RBA unemployment target of 4.5% the figures fall below expectations.

The issue with the unemployment situation is summed up neatly in the graph below.  The participation rate for males in the workforce has been falling but may have bottomed out at levels just above 70%.  However female participation rates have been rising strongly with no signs of this trend changing and so the overall participation rate will be expected to continue to rise driven by more females joining the workforce.  The rise of the employment to working age population ratio is also a reflection of the fading of the traditional roles of the male in households earning money through employment and the female raising the family.  Now increasingly both parents are working.  It is also possible that this situation is forced upon many households because of the increased cost of mortgage payments and other household debts.

Looking into the figures more deeply, the private sector has been struggling with manufacturing, construction and retail sectors losing 62,500, 50,000 and 25,000 jobs respectively in the year to March 2019.  However, this has been offset by an increase of 164,000 jobs in the public sector where spending has increased by over 5% in the last year.

Further restrictions on the skilled migrants program has also created a mis-match between the skills desired by employers and the skills offered by those seeking work.  Jobs website, Indeed, looked at mismatches between the job titles of those seeking employees and potential employees seeking jobs and found the mismatch to be around a third in Canada and the US, and 40% in the UK; while it was 50% in Australia with unfilled opportunities for those with skills and experience as Business Development Managers, Physiotherapists, Occupational Therapists, Project Managers and Fitters, whereas there were more jobseekers in generally lower skilled roles as customer service representative, cleaner, server, kitchen team member and sales assistant. 

There are three broad future scenarios that can occur:

Positive: The recent RBA interest rate reductions, tax cuts, increased fiscal spending and an improved global outlook all combined seek to stimulate the economy and business such that labour hiring and job creation outstrip the “natural” increases in those looking for work due to population growth and the uptrend in the participation rate. This causes the unemployment rate to fall from 5.2% and as the rate approaches or reaches 4.5% (or wherever the NAIRU limit actually occurs) this causes labour shortages meaning businesses need to increase wages to attract the workers they need. The increased wages further stimulates consumer spending (which means businesses sell more products and services) and this returns GDP growth and consumer inflation back towards target figures.

Neutral: The monetary and fiscal stimulus efforts above, coupled with global economic conditions only provide sufficient stimulus to keep jobs growth at a level sufficient to absorb the increased number of workers in the market meaning the unemployment rate remains broadly unchanged in the range of 5.0% to 5.5% which is insufficient to cause wage inflation and the current economic conditions of very low wage growth and below target GDP growth and consumer inflation that has occurred over the last three years likely continue.

Negative: The monetary and fiscal stimulus efforts above, couple with global economic conditions are insufficient to absorb the increased number of workers looking for jobs or more hours (level of under-employment). Unemployment rises. There are job losses which in turn feeds into higher levels of mortgage defaults given the high level of household debt and this puts further downward pressure on house prices as banks curtail lending and buyers look for distressed or forced sellers. Consumer spending and confidence fall and with it business confidence, conditions and investment and the economy slows further from its current levels.

The RBA’s position until the end of the first quarter this year was the positive scenario was expected to occur without any further reductions in interest rates. In the last few months, the RBA has recently felt the need to reduce interest rates in response to no change to wage inflation and the unemployment rate rising from 5.0% to 5.2% with leading indicators collectively pointing to a likely future slowing in jobs growth. It would appear to Amicus, the cause of the RBA’s change of view is that the Australian economy is now more likely to move from the Neutral to the Negative scenario and this, rather than a failure to reach the Positive scenario, was the real reason for interest rate cuts and speeches urging the government to increase fiscal stimulus. It would therefore seem to us the most likely scenario going forward is the Neutral one, followed by the Negative, with the Positive being the least likely.

We will be advising our clients how to manage their investment portfolios to minimise risk and maximise returns in what is likely to be a more dynamic economic scenario than has been the case over the last five years.

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