RBA: Unemployment Has Seen Its Worst Days


The Reserve Bank today released its highly anticipated monetary policy statement. If you’re not familiar with this report, think of it as a guideline for future policy. It basically tells us what the RBA’s position on interest rates is going forward.

What did the bank reveal in the report?

Let’s get interest rates out of the way first. The bank said it would adjust its policy as necessary. In other words, it told us nothing that we didn’t know. And why would it? Recent rate cuts have failed to provide the kind of boost to the economy the RBA expected. They have little appetite for cutting rates again soon.

Now that’s out of the way, we can concentrate on the juicy bits.

The RBA had quite a lot to say on the unemployment rate.

The long and short of it is that the bank expects unemployment to hold steady until 2017. In fact, the RBA thinks the unemployment rate has reached its peak. It expects the jobless rate to slowly improve within 18 months. Why such optimism?

It has to do with Australia’s slowing population growth. The number of migrants entering the country is decelerating. The nation’s working age population will grow at 1.5% up to 2018. That’s down from previous estimates, which had growth penned at 1.75%. As this continues in the next few years, the RBA expects the pressure on unemployment to ease.

That’d should enough to keep unemployment hovering around 6%, according to the bank.

That’s quite the turnaround compared to a few months ago.

As recently as May, the RBA indicated unemployment could hit 6.5% in the coming years. Yet now it believes it’ll hold steady at around 6.1%.

Their optimism is even more revealing considering the timing of their report. Today’s statement coincided nicely with the release of yesterday’s unemployment figures. That means the RBA has had 24 hours to carefully consider its statement. Despite the rise in unemployment to 6.3%, they chose to remain upbeat.

This could mean two things.

It may suggest the RBA is confident we’ll see no repeat of rising unemployment in the coming months. That’s not improbable, considering unemployment went up because more people started looking for work. But it does suggest the RBA thinks the spate of new jobseekers has reached a ceiling.

Or, the bank might simply be relying on the trend unemployment rate, which remains at 6.1%.

Either way, the markets like to take cues from the RBA. The bank’s forecasts should allay fears that the jobs market will worsen.

The Aussie economy’s ‘new normal’

As population growth slows, the fewer number of workers will lead to lower unemployment. But the downside is that it’ll also worsen Australia’s potential economic growth too.

That explains why the RBA recently downgraded the long-term economic potential for the economy. It feels we need to readjust our long-term expectations for national growth. The suggestion is that this could amount to 2.5% growth, rather than the 3.5% we’ve come to expect.

Either way, there are both positive and negative forces working against economic growth.

One of these downsides is the government’s recent drive to reduce the budget deficit. The RBA says attempts to fix the deficit is hurting economic growth. The bank expects GDP growth to decline by 0.5% per year over the next four years as a result.

The RBA is right to say that cutting back on government spending lowers the likelihood of achieving growth. But we can hardly blame the government for trying to paper over a $40 billion hole.

But the RBA is confident rising consumer confidence, in addition to improving business conditions, will offset cutbacks in government spending.

The reasons why the RBA will keep rates on hold

The expectations for a steady unemployment rate aren’t the only reason for the RBA’s optimism.

As mentioned, non-mining business conditions are improving. Consumer confidence is on the up. And the RBA is content with the value of the dollar, currently sitting below $0.74. The RBA expects these factors will help the economy adjust to deteriorating conditions elsewhere.

As a result, the RBA believes it has enough ammo to prevent another rate cut. But it still finds itself in somewhat of a dilemma.

On the one hand, the RBA doesn’t want to cut rates — as it’ll have little impact on the economy.

On the other hand, it needs something to drive the dollar lower. Even if it’s happy with the dollar’s current value, it wants to see it edge below $0.70.

What it’s waiting for is for the US Federal Reserve to act. A rate hike in September would allow the RBA to keep rates on hold. The dollar would then depreciate without any action on the RBA’s part.

I suspect this anticipation for a US rate rise is partly why they’re confident about the economy. If the RBA can use external factors to help its cause, it’ll make its own monetary policy more effective in the long run.

Mat Spasic,

Contributor, The Daily Reckoning


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1 year 2 months ago

Fairy tales from the Reserve Bank.

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