The unemployment figures due for release on Thursday are unlikely to throw out too many surprises. Economists expect that the current 6.2% unemployment rate will remain unchanged.
But the long term outlook is less rosy. NAB chief Alan Oster says unemployment may remain stubbornly high for the foreseeable future. He explains:
‘[With weak domestic demand] unemployment [will rise] to around 6.4% by the of 2015. [Unemployment] will remain relatively high for some time’.
That’s no surprise if you’ve been following the recent trajectory of the Aussie economy. We had our worst trade deficit in four decades last month. The economy can’t rely on strong export revenues to keep the unemployment rate down anymore. That’s been apparent for a long time now, but it’s becoming more obvious with every passing month.
But Mr Oster’s view is particularly interesting for one key reason. NAB surveys show that business confidence actually improved during May. The confidence index climbed by four points (to seven) in May. That’s the highest level it’s been in a year.
NAB put the rise down to two reasons. The first was the expected impact of the RBA’s April rate cut. The second was the perception of a favourable federal budget for businesses. Improving business confidence no doubt reflects the government’s new tax breaks for small businesses. The measure is expected to increase business to business spending over the next few years.
Yet despite this improvement, Mr Oster said that unemployment is unlikely to improve. What gives? Mr Oster explains:
‘[The economy] is still struggling to offset the impact of sharply lower mining investment’.
No surprises there. Iron ore and coal exports took a major hit in April. Forecasts show a rebound in mineral exports for May, but the long term outlook remains poor. Low prices will continue to drag on mining revenues — and Australia’s economic position — in equal measure.
Lower export revenues will make it more difficult for all business sectors to increase spending. That’s because mining revenues trickle down to every corner of the economy.
The drop in export revenues makes it hard to see how businesses could increase spending on a larger scale. They’ll certainly need to invest far more than they’re currently doing if they’re to keep unemployment from rising.
The problem is that recent forecasts for future business spending paint a gloomy picture. Let me explain.
Why business spending is the key to unlocking the high unemployment rate
The unemployment rate won’t budge as long as business spending remains flat. Yet there’s no sign that businesses will be increasing spending significantly. Certainly not enough to make a real difference to the unemployment rate anyway.
Recent capital expenditure figures show that business spending will plummet in the next year. Capital expenditures are set to tank by $100 billion during 2015-16. That makes the uptick for the confidence index in May look less impressive. Business confidence may be improving, but it’s not likely to be enough to offset such massive spending cuts.
But it’s not just the mining sector that’s at fault here. Mr Oster explains:
‘While there has been some improvement in recent data, capex expectations in the non-mining sector have weakened. [As a result] businesses remain reluctant to employ and consumers remain cautious’.
On top of that, stagnant job ad numbers for May point to further signs of pressure facing employment. NAB’s survey may show that business confidence is up, but job advertisements aren’t growing at all. Online and newspaper ads ground to a standstill in May. They barely changed from the 145,000 average weekly ads during April.
The job ad numbers tells us a few things. The first is that improved business confidence is a bit of a smoke screen. They may feel more confident about consumer and business spending, but will that lead to new hiring? Right now, the answer appears to be no.
That should come as a great disappointment to the government. Their small business tax breaks were designed with new job creation in mind.
Why are business so reluctant to hire?
Consumer demand is the real point of contention here. Business investments are only a reflection for how they perceive future consumer demand. The current long term uncertainty over demand affects hiring and other investments.
As long as that remains the status quo, the unemployment rate has little chance of improving. That makes it easier to see why unemployment may get worse before it improves.
Sadly for Australia, that points to an ever worsening economic situation.
The unemployment rate is a strong indicator of the health of the Australian economy. With the exporting sector suffering badly, we need clear signs that our consumer base is ready to take up some of the slack.
But not everyone is buying the idea that the unemployment rate — or the economy for that matter — is fixable. The Daily Reckoning’s Greg Canavan believes we’ve gone past the point of no return. As one of Australia’s leading investment analysts, Greg is convinced that Australia faces a recession. He thinks it will hit us by the end of the year.
In a free report, ‘Australian Recession 2015: Unavoidable’, Greg reveals why our economy finds itself in the hole it’s in. He’ll show you why debt levels have spiralled out of control. And why that means a recession is almost inevitable. But he also wants to show you a way to protect your wealth. Greg believes there are actions you can take right now to lessen its impact on your financial wellbeing.
Download your free copy today and Greg will take you through the steps that will shield you from the imminent crash. To find out how to download his free report right now, click here.
Mat Spasic,Contributor, The Daily Reckoning