Yahoo Finance Rate cuts even more likely as jobs market cools
As the economy weakens, more rate cuts will be needed, and delivered.
The December labour force data were bad news, and there were many worrying subsets in the figures.
The lowlight was the plunge in full-time jobs – down a stunning 106,600 in December - which put the level of full-time employment at a six-month low. In addition, the hours worked in the economy fell again, to be down more than 1 per cent since the middle of 2023. This is problematic for workers - fewer hours worked means lower take-home pay, which means lower spending at a time when the economy is clearly struggling.
Firms only adjust the hours worked by their staff if they don’t have much work for them – slowing business activity, in other words, is confirmed in the data. The participation rate also fell sharply, while the unemployment rate was steady at a one-year high 3.9 per cent, up from a low of 3.4 per cent in the middle of 2022.
Suffice to say, the news was not good for the economy or for the labour market, which is at risk of a sharp deterioration.
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One of the key linkages in economics is the relationship between economic growth and the labour market. History shows time and time again that, as economic growth accelerates and is sustained at a solid pace, businesses register higher sales, turnover grows and - in response to this extra demand - they need more staff. As hiring picks up in these circumstances, the unemployment rate falls.
The opposite is the case when the economy slows. Business turnover drops and firms not only stop new hiring but, in some cases, staff are retrenched and unemployment rises.
Slower economic growth means higher unemployment and weaker employment growth. This was the story for the Australian economy in 2023.
It is a simple link.
This economic slowdown scenario is unfolding now. Recall that quarterly GDP growth over the past four quarters to September 2022 has been 0.9 per cent, 0.5 per cent, 0.4 per cent and just 0.2 per cent. The December-quarter data, which will be released in early March, is likely to show yet another weak GDP result.
Demand for labour is also falling. Job advertisements and vacancies are sharply below the peak levels of mid-2022. This is a precursor for higher unemployment in the next three to six months.
When the Reserve Bank (RBA) shocked the market and hiked interest rates in November 2023, it revised its forecasts for unemployment lower. Even with that hike, the RBA was forecasting the unemployment rate to peak at 4.3 per cent, which at the time was odd and now looks badly wrong.
It will be higher than that. Indeed, the unemployment rate could hit that level before the middle of 2024 and approach 5 per cent by year’s end and into 2025. If so, it will confirm an over-tightening of monetary policy from the RBA last year that will need to be urgently reversed to slow down the speed of the deterioration in the labour market.
Interest rate cuts are likely through 2024. The current debate concerns the timing of the first cut and then how many cuts will be delivered as the economy and inflation stall.
At this stage, around 50-100 basis points of interest rate cuts are anticipated by early 2025. The weaker the economy gets, the higher the unemployment rate. More interest rate cuts will be needed and delivered.
Eyes are now on January 31 and the release of the December inflation data. A further step down in inflation is certain and, if there is a downside surprise, the talk of interest rate cuts will intensify.
Rate cuts will be needed to lower the risks of a major meltdown in the labour market and hopefully prevent unemployment hitting 5 per cent.
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