Dreadful labour market data - bring on an interest rate cut

Wed, 13 Aug 2014  |  

The labour market is in dreadful shape. Not only is the unemployment at a 12 year high at a rate about 1.5 percentage points above full employment, but the employment to population ratio has slipped to a 9 year low and now annual wages growth has slumped to a level never before recorded by the Australian Bureau of statistics. There are close to 800,000 people unemployed.

This cocktail of horrible news belittles the huffing and puffing we all engage in each week on consumer sentiment, business confidence, retail sales, house prices, exports, the stock market, world GDP and the terms of trade. These data points count for little when the end game of economic policy making is growing the economy fast enough to support the labour market, and clearly on that score, economic policy is failing.

Quite obviously, the labour market information is telling everyone who bothers to listen that the economy is growing too slowly after a promising start to 2014. Over the past six years, for example, there have been only two quarters where annual GDP growth has been above 3.5 per cent and for three years, annual growth was below 2.5 per cent.

The average annual GDP growth rate over the past six years has been a sub-standard 2.5 per cent, some 0.75 per cent per year below trend. The output gap that has built up over this time must now be significant.

With current fiscal policy being directed at a mild tightening, the unimpressive growth rate and labour market malaise means there is now a need for more monetary policy stimulus. The RBA needs to cut interest rates to boost cash flows for those with debt and to encourage new private sector investment. Only then is it likely that the economy will grow at a pace that will generate enough activity to see the unemployment rate get anywhere near 5 per cent over the next couple of years.

The next RBA Board meeting is in three weeks, and there is more than enough information before it to suggest an interest rate cut will be considered. The RBA shouldn't sit by and watch the unemployment rate skyrocket and wages growth free-fall. With inflation in check, it can ease monetary policy to try to turn the labour market around.

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For many people, the cost of the fires is immeasurable. 

Or irrelevant. 

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