Yahoo Finance Why the economic slowdown is yet to hit unemployment
The strong jobless figures are no reason for the RBA to continue raising interest rates.
Australia’s resilient unemployment rate might suggest 12 months of interest rate hikes are having little effect on the labour force but, in reality, a clear picture of the economy’s strength is yet to fully reveal itself.
Before we dig into the latest labour force data, here is a little update on some core economic linkages.
In very simple terms, when monetary policy is tightened through higher interest rates, the pace of economic growth slows. This means that the growth in consumer spending is lower because the cost of servicing debt increases, and the incentive to save and not spend changes.
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When, in time, businesses realise this slower growth is not a temporary change in their business turnover, they react by reducing their staffing requirements, which leads to an upturn in the unemployment rate.
Economic research has concluded that the lag between the initial policy tightening and its eventual impact on the labour market is, to use the jargon, “long and variable”. This translates to a period of around six to 18 months – depending on what else is happening and how aggressive the policy tightening is.
In the current economic cycle in Australia, the interest-rate-tightening cycle began in May 2022, and it has been tightened continually through to June 2023. This means that, in rough terms, only about one-third of the economic effect of the interest rate rises has impacted on the labour force data, with another two-thirds to go.
And that is without any further increase in official interest rates from the current level of 4.1 per cent.
This brings us to the latest labour force data.
The rate of employment growth is chugging along, not booming. The unemployment rate, while terrifically low, is no longer falling. Indeed, the unemployment rate has been fly-papered to a rate close to 3.5 per cent for the past year.
It is a great result, on any measure, but it does suggest the extent of any overheating in the labour market is not getting more acute.
Employment rose by 33,000 in June, a level that is consistent with the increase in the workforce. In other words, the rate of population growth is such that employment needs to increase by around 30,000 to 35,000 per month, every month, to leave the unemployment rate steady. And that is all that is happening at the moment.
This points to a broadly steady trend in the labour force in the recent data.
It is not clear whether or not the labour market is overheating. This will only be tested when comprehensive data on wages are released in the middle of August.
If annual wages growth continues to hover around 3.75 to 4 per cent, it will suggest a strong, but not overheating, labour market. As such, it will put into question the Reserve Bank’s (RBA) goal of getting the unemployment rate to 4.5 per cent as it strives to keep wages - and, therefore, inflation - in check.
For the RBA, it is increasingly clear that it has done enough in terms of interest rate hikes to slow the economy and, in time, weaken the labour market. The full effects of its policy actions, assuming no more rate hikes, will not be fully apparent until about the middle of 2024.
The minutes from the RBA’s July board meeting observed that: “Although economic growth was slowing, the continued tight labour market reflected the usual lags from activity to labour market outcomes.”
That is true.
With inflation free-falling towards the targets of central banks around the world - including in Australia - it is increasingly the case that the interest-rate-hiking cycle is at, or very near, an end even though the labour market remains firm, for now.
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