Yahoo Finance How high will unemployment get? Is your job under threat?
More rate hikes could feed into 200,000 people being added to the ranks of the unemployed.
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.
One reason for the interest rate hikes already delivered, higher wages growth that fed directly into prices - a wage-price ‘spiral’ in other words - is not evident in the data.
RBA governor Michele Bullock acknowledged this in her recent public comments on the wage-price relationship. Higher unemployment will ensure this to be the case.
It is also obvious to the RBA that many of the factors slowing the fall in the inflation rate have nothing to do with Australian interest rate settings.
The price of oil and petrol is being driven by supply issues in Saudi Arabia, Russia and other oil-producing countries. While a further rate hike would add another 10,000 to 20,000 people to the ranks of the unemployed, it would have zero effect on petrol prices. And remember, all of the forecast error of the September-quarter inflation data was due to the one-off spike in petrol prices.
Excise changes have seen tobacco and alcohol prices rise – it would be irrational to think that these price changes are linked in any way to the stance of monetary policy. So too insurance premiums which are higher, in large part, due to climate change and erratic weather.
Suffice to say any further interest rate increases from here risk magnifying the extent of job losses - extra people unemployed, in other words.
More rate hikes could feed into 200,000 people being added to the ranks of the unemployed. This is not the sort of legacy the relatively new governor of the RBA, Michele Bullock, would like in her first year or two of being in charge of setting interest rates.
Follow Yahoo Finance on Facebook, LinkedIn, Instagram and Twitter, and subscribe to our free daily newsletter.
