The soggy, sub-trend pace for Australian economic growth continues to take its toll on the labour market.
The unemployment rate was 6.4 per cent in January, a 12 and a half year high and it locked in 8 straight months of unemployment at 6 per cent or more. The last time this happened was in 2003 and that was when the unemployment rate was on the way down from levels at 8 and 9 per cent.
Employment fell 12,200 in January, which meant the employment to population ratio fell to 60.7 per cent, to remain near the low for the current cycle.
With the labour market so soft, it is little wonder consumer demand is muddling along, sentiment is erring on the side of pessimism and wages growth remains at a record low. The missing ingredient for employment is economic growth. Anything below 3.25 per cent for real GDP growth means that unemployment will be skewed up and no forecasters ,including the RBA and Treasury, have a forecast that has real GDP above that pace in any reasonable forecast horizon. Certainly not 2015 and probably not 2016.
The bottom line is that the pace of economic growth is simply too weak to make meaning and lasting inroads into the unemployment problem. With fiscal policy in a state of flux with the budget still three months away and the policy signals from the government confused at best, the heavy lifting in the near term is clearly on the shoulders of the RBA.
A further few interest rate cuts are needed with the March Board meeting set to deliver what will be the tenth rate cut in this protracted monetary policy easing cycle which began in November 2011. My guess is that the cash rate will need to be set at 1.5 per cent or so to guard against an extended period of economic weakness and to prevent the unemployment rate from rising above 7 per cent.
The budget in May will be hugely important. Will the government stick with its blinkered strategy of erring towards fiscal tightening or will it view the weak economy, rising unemployment and problematic global outlook as reasons to embrace the policy lesson from the previous government and Treasurer Wayne Swan and work to stimulate growth through a relaxation of fiscal settings?
As Treasurer, Wayne Swan knew when good economic policy overrode any political issue associated with a quest for budget surplus. There are tens of thousands of people with a job now thanks to that policy pragmatism of Mr Swan who would have lost out if the objective of a Budget surplus had been blindly pursued.
Let’s see if Mr Hockey can follow this lead from Mr Swan and do something either now or in the budget to kick start growth and reverse the ever increasing unemployment rate.