RBA 'pigheadedness' risking thousands of Aussie jobs as economy slows

The Australian jobs market has hit a brick wall.

Unemployment and underemployment are both rising, the growth in employment has stalled and the total number of hours worked by those with a job is free-falling.

This is the normal and usual reaction to the marked slowing in the economy and more weakness is likely in the months ahead as the rate of overall economic growth continues to slow.

It is something that the Reserve Bank of Australia (RBA) was aiming for and hoping to see as it embarked on its most aggressive hiking of interest rates in 50 years. The fact that it hiked interest rates too much and seems pig-headed about the prospect or need to take some pressure off the economy with interest rate cuts, risks compounding a sharp deterioration in the labour market in the next year.

The most fundamental issue is that higher unemployment will put downward pressure on business labour costs which means that firms can limit any increase in their selling prices and in turn is how the inflation rate falls back to the RBA’s target.

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What the data shows

Employment rose by a puny 500 people in January after falling 62,800 in December.

Total hours worked in the economy fell a staggering 2.5 per cent in January and are down an extraordinary 5.7 per cent from the peak in April 2023.

The unemployment rate rose to 4.1 per cent, up 0.2 percentage points from December and it is now well above the cyclical low of 3.4 per cent registered in October 2022.

The underemployment rate, which measures people who have a job but want to work more hours, rose to 6.6 per cent.

Looking at the unemployment rate through a human lens, in January there were 600,600 people unemployed. This is 114,100 more than recorded in the recent low in October 2022.

The number of people underemployed, that is those who have a job but want to work more hours, has jumped 144,100 people from the low a little over a year ago to 983,500 in January 2024.

What does it mean?

The labour market will deteriorate in the next year, or at least until economic policy is eased. The economy is weak and is not growing fast enough to create the jobs needed to keep the unemployment rate steady, let alone lower it.

Late last year, the RBA was forecasting the unemployment rate to peak at 4.3 per cent, which it revised to 4.4 per cent with the February Statement on Monetary Policy.

This looked wrong at the time and even more so with today’s data.

The RBA view looks optimistic given the loss of momentum in the economy. The pig-headedness of the RBA to acknowledge its errors, and as a result to correct them, risks the unemployment rate peaking around 5 per cent, which will see a further 125,000 to 150,000 added to the ranks of the unemployed.

It does mean that pressure will build on the RBA to ‘get real’ and cut interest rates.

The timing of the first interest rate cut remains open to debate. The RBA Governor, Michele Bullock, has been given a series of public statements suggesting the Bank has not considered cutting interest rates. Perhaps these labour force data will trigger a rethink.

Money market investors are estimating a 40 per cent chance of a 25 basis point interest rate cut by May and 100 per cent chance of a cut during the second half of 2024.

This is the least the RBA is likely to do.

As has been evident for some time, it will be the trend of unemployment and how rapidly inflation falls that will determine the timing and extent of the inevitable interest rate cuts.

With the recent RBA forecasting record on inflation and the unemployment rate being blown out of the water, it would be no surprise to see a series of interest rates through 2024 and into 2025. It is not unreasonable to expect 100 basis points of rate cuts once the rate cutting cycle begins.

Rate cuts will be essential to allow the economy to recover and to ensure the unemployment rate increased is contained.

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