The Reserve Bank of Australia is optimistic about the future direction of the unemployment rate. I don’t know about you, but it’s hard to share their optimism.
The jobless rate rose slightly to 6% in June. That was up from a revised 5.9% rate in May. These figures led the RBA to believe unemployment was ‘stable’.
Well, a 0.1% rise in unemployment is a sign of stability, if you’re the eternal optimist. Calling the current jobless rate stable is a polite way of saying that it’s not a complete mess at present. But there’s little doubt the next 12 months will bring anything other than bad news on that front.
Well, the unemployment rate is never a true reflection of the current state of the economy. It’s merely a snapshot of how things looked at a particular point in time gone by.
You may have heard of this. It’s the so-called time lag effect. Essentially, it describes the relationship between actions and consequences. Moreover, it suggests that actions have a long term, gradual effect on the economy.
For example, an interest rate change takes time to seep through the economy. If a business invests in a project, but interest rates rise, they’re unlikely to stop the development altogether. But it may influence their decision to take on other projects in the future.
This time lag effect is highly applicable to the Aussie economy right now. Two reasons for this stand out.
One is the dual effect of falling mining revenues and rising trade deficits. The other relates to business spending, which is set to nosedive over the next 12 months.
We’ll look at these in greater detail below, but I want to stick with the RBA for a moment.
Is the RBA right to be optimistic about the unemployment?
The Aussie economy currently has a laundry list of problems. All of them, directly or indirectly, are potentially hazardous to the jobs market.
The stubborn unemployment rate in many ways captures the mood of the economy perfectly. Everyone agrees that things are getting worse, but the situation is still stable enough to temper any immediate concerns. We’re stuck in limbo, in effect.
When we predict the future state of unemployment, we need to consider the time lag effect. At this point, we have two benchmarks from which to make any forecasts.
The government, on one hand, believes unemployment will level off at 6.5% in 2016. The RBA, meanwhile, argues that this is too pessimistic an estimate. So who’s right? In my view, the government’s estimate seems a lot more plausible. There’s too much pessimistic economic data coming out to suggest an improving economy. And unless the conditions improve, it’s hard to see how unemployment can remain even at 6%.
That’s why it’s hard to share the RBA’s optimism about the direction of the jobs market. That’s truer still when you consider that one of their arguments amounts to nothing more than number fudging.
The RBA points to ABS data as evidence for optimism. These figure indicate that employment outpaced population growth over the last year. As a result, the RBA says that demand for labour will remain robust enough to ensure stability in the unemployment rate.
It’s understandable that they’d put a positive spin on this. But really this is no different to people who stop looking for work. This data doesn’t suggest an improving jobs market. It suggests the opposite in fact. If anything, it comes across as self-defeating. The numbers make for better reading. But at the end of the day fewer people are in work.
If the unemployment rate is to improve, we need to create jobs, not remove people. Sooner or later, it won’t be enough to rely on slowing population growth to fix the jobless rate. After all, this trend only suggests the underlying problems are getting worse, not better.
People aren’t looking for work because there is less of it go around. If there’s fewer jobs in the economy, then the economy has deeper problems. It’s self-explanatory.
Yet these underlying problems remain lurking in the background. We know that things will get worse. Even the most basic of data illustrates this to a tee.
Australia recorded its worst trade deficit in 44 years in the first quarter of 2015. We’re importing more, while export revenues continue to decline simultaneously. Iron ore and coal revenues fell by a combined $2 billion in April alone for instance.
The effects of a worsening trade deficit are both immediate and gradual. On the one hand, workers are losing jobs as producers cut back on costs. But it also affects government budgetary spending. As the trade deficit balloon, it’ll put more pressure on the government to cut back on spending. This potentially threatens jobs across the entire public sector in the future.
Business investment set to fall sharply
Declining business investments are one of the biggest concerns facing the economy in the next 12 months. Businesses already indicate that total non-mining investments will drop by $104 billion to mid-2016. If that sounds like a lot of money, it’s because it is.
Even with relatively buoyant consumer confidence, businesses still refuse to spend. The reason for this is that they want to see better returns on investments. Simply put, they’re not seeing any benefit to investing now, so they’re sitting tight.
This lack of investment represents $104 billion that won’t be spent on new projects and hiring’s. This is the most worrying development as far as I see it. Non-mining investments will fail to offset the decline in resource sector revenues.
In fact, business spending is the primary reason to remain sceptical of the RBA’s optimism. It seems counterintuitive for unemployment to improve if businesses aren’t spending.
That means the Aussie economy is currently facing a two-pronged assault. With all sectors of the economy expected to cut back on spending, you can’t have jobs growth. There’s little doubt we’ll start to see this reflected in the unemployment rate soon.
The RBA can rest on their laurels. They can even call the jobless rate stable. But the dual effect of a worsening trade deficit and lower business spending are working behind the scenes. In the long run, they’ll make any optimism about the jobless rate look foolishly misplaced.
Contributor, The Daily Reckoning
The RBA’s efforts to prevent long term economic decline will come to naught. There are too many effects in motion that spell trouble for the Aussie economy.
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