How high will unemployment get? Is your job under threat?
As the economy slows under the weight of a record run of interest rate hikes, a weak global economy and a tight budget, the unemployment rate is increasing and it will get higher in the year ahead.
The important policy and social question is how high unemployment goes before it reaches a peak.
Already in the current economic slowdown, which has seen GDP per capita fall for the past two quarters, the number of people unemployed has risen by 34,200 from the low point in July 2022 to the most recent data for September 2023. The current unemployment rate is 3.6 per cent.
The most recent Treasury and Reserve Bank (RBA) forecasts are for the unemployment rate to rise to around 4.5 per cent in late 2024 and into 2025, such is the extent of the weakness in the economy. And this is without any further interest rate increases.
A 4.5 per cent unemployment rate translates to an extra 150,000 people without a job. This is a massive cost from the tight monetary policy needed to slow the economy and return the inflation rate to the RBA target.
Any further interest rate increase from the current 4.1 per cent cash rate will make the unemployment picture even worse and such a move is not needed.
As things stand, the range of job vacancies and advertisements data are turning lower. Business surveys show a downturn in labour demand as the economy slows.
It is obvious that the path to higher unemployment is already locked in, it is just unclear how high it goes, which sectors are impacted most and whether the economy can get through the transition to low inflation without an even worse outcome for the unemployed.
Also by the Kouk:
It would be bad news and a clear sign of a policy mistake from the RBA if the unemployment rate were to rise anything above 4.5 per cent in the current cycle, especially when inflation is falling, wages growth is in check and the global economy is registering sub-trend growth.
Yes, the economy had to slow from the post-pandemic boom to get inflation down and to normalise interest rate settings but, as has been evident for some time, the reasons for the most recent rate hikes have been largely unfounded, making the case for a further hike difficult to construct.
Importantly, inflation is falling much as expected by the RBA. There was never going to be a speedy return to the RBA’s 2-3 per cent inflation target from the peak around 8 per cent less than a year ago. That said, if the experiences from the US, Canada and Europe are any guide, Australia’s inflation rate could be well below 3 per cent by the middle of 2024, perhaps earlier.
