Aussie labour market: Why beauty is in the eye of the beholder

Sat, 18 Mar 2017  |  

This article first appeared in the Yahoo 7 website at this link: 


Aussie labour market: Why beauty is in the eye of the beholder

Economic facts do not always give an accurate reading on the health of the economy. Or rather, they are open to interpretation and, as in most things, the beauty is in the eye of the beholder.

Think of today’s labour force data.

The unemployment rate in seasonally adjusted terms in February was 5.9 per cent. Whether that is a ‘good’ or a ‘bad’ number is open to interpretation. Compared with January, the unemployment rate was 0.2 percentage points higher; compared with middle of 2015 ago, it was 0.4 percentage points lower; compared with the recent low point in the unemployment rate just prior to the global financial crisis, it was almost 2 percentage points higher.

See the difficulty in determining whether it’s a good or bad result?

The fact is that none of these comparisons give a complete picture on the health of the labour market or indeed, whether the unemployment rate at 5.9 per cent is good, bad or indifferent.

Suffice to say, each month the unemployment rate should be compared with the level of full employment in the economy. In other words, it should be judged in context of whether the economy has been performing strongly enough to ensure that everyone who wants a job has a job. Anything less is failure.

Using economic jargon, full employment occurs when the unemployment rate is as low as possible but consistent with a sustainable rate of wages growth that is in turn consistent with the official 2 to 3 per cent target for inflation. The recent history for Australia suggests that the full employment unemployment rate is around 4.5 to 5 per cent or a tick lower.

Today’s 5.7 per cent unemployment rate is far from good. It is around 1 to 1.5 percentage point higher than it should be which owes much to the last half decade of below trend economic growth. The economy simply hasn’t been growing fast enough to generate the economic activity needed boost employment and drive the unemployment rate lower.

The current forecasts from Treasury and the Reserve Bank of Australia are for the unemployment rate to remain around 5 to 5.5 per cent for the next couple of years – and this assumes, perhaps optimistically, further strong momentum in the global economy, a positive influence from the higher terms of trade and ongoing low interest rates.

In other words, the outlook for unemployment is reasonable without testing full employment. And if anything goes wrong, say commodity prices tick lower or the housing market falters, the unemployment rate will remain in a 5.5 to 6 per cent range. It is too high.

To achieve a lower unemployment rate and full employment, domestic policy settings need to be directed at stronger growth. Interest rates could be cut, for example. With the US Federal Reserve hiking interest rates this morning, a rate cut in Australia would probably drive the Australian dollar lower which would boost the local economy. In the budget, which is less than two months away, the government could deliver a mild fiscal stimulus aimed at moving the economy towards full employment.

In the interim, the unemployment rate is too high. That unemployment rate translates to 750,000 people unemployed. A full employment target is not only imposing a social cost, but it represents untapped resources that, if utilized, would add to growth.

Lowering unemployment is not only good for those who are currently unemployed, it is good for the economy.

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As house prices fall across Australia, should we be worried for our economy?

Tue, 13 Mar 2018

This article first appeared on the Yahoo7 Finance website at this link: 


As house prices fall across Australia, should we be worried for our economy?

Are you a home owner?

If you are in Sydney, Perth and Darwin, you are losing money at a rapid rate.

In Melbourne and Canberra, prices are topping out and there is a growing risk that prices will fall through the course of this year. If your dwelling is in Brisbane or Adelaide, you are experiencing only gentle price increases, whilst the only city of strength is Hobart, where house prices are up over 13 per cent in the past year.

The house price data, which are compiled by Corelogic, are flashing something of a warning light on the health of the housing market and therefore the overall economy. For the moment, the drop in house prices has not been sufficient to unsettle the economy, even though consumer spending has been moderate over the past year.

The importance of house prices on the health of the economy is shown in the broad trend where the cities that have the weakest housing markets tend to have the slowest growth in consumer spending and are the worst performance for employment and the unemployment rate. The cities with the strongest house prices have strong labour markets and more robust consumer spending.

Trump could cause the next global recession: here's how

Wed, 07 Mar 2018

This article first appeared on the Yahoo7 Finance website at this link: 


Trump could cause the next global recession: here's how

The Trump trade wars threaten the global economy. This is not an exaggeration or headline grabbing claim, but an economic slump based on a US inspired global trade war is a distinct and growing possibility as it would dislocate global trade flows, production chains and bottom line economic growth.

Up until a few weeks ago, there was a strong enthusiasm for the economic policies of US President Donald Trump. Tax cuts and planned infrastructure spending were seen to be good for the US and world economies. US stocks and many around the rest of the world rose strongly, to a series of record highs. At the same time, bond yields (market interest rates) surged as the market priced in interest rate hikes and inflation risks from the ‘pro-growth’ policies. It was seen to be good news.

Very few, it seems, were worried about the consequences for US government debt and the budget deficit from this cash splash, especially when the US Federal Reserve was already on a well publicised path to hiking interest rates.

About a month or two ago, a few of the more enlightened and inquisitive analysts started to focus on the fact that the annual budget deficit under Trump was poised to explode above US$1 trillion with US government set to exceed 100 per cent of annual GDP.

A debt binge fuelled by tax cuts was a threat to the economy after the temporary sugar hit.