3 reasons to be spooked about the economy

Mon, 18 Jun 2018  |  

This article first appeared on the Yahoo 7 Finance website at this link: https://au.finance.yahoo.com/news/3013537-004842668.html 

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3 reasons to be spooked about the economy

Optimism about the Australia economy is rapidly being eroded by the hard reality of a weakening in the labour market, falls in house prices, a tightening in credit and chronically low wages growth. The labour force data for May were not good news, even with the blip lower in the unemployment rate.

Employment rose a tepid 12,000 in May, with full time jobs dropping a chunky 20,600 which was offset by a 32,600 rise in part time roles.

The jobs bonanza of 2017 has turning into a jobs famine. In the four months since January, employment has risen by a total of just 26,000 at a time when the working age population has surged by over 110,000. In other words, the economy is generating jobs for less than a quarter of people being added to the workforce. The economy simply isn’t strong enough to create employment for the increase in population through immigration and natural increase.

Indeed, the average monthly increase in employment over the past four months has been a paltry 6,500, down from the 34,400 per month during 2017. At this rate, employment growth in 2018 will be lucky to reach 150,000.

Despite the softer employment trends, the unemployment rate edged lower in May, to 5.4 per cent, to match the low of late 2017. This continues the trend which has seen the unemployment rate at 5.4 to 5.6 per cent for every month since May 2017. Importantly, the underemployment rate rose to a near record high 8.5 per cent of the workforce. Underemployment measures people who have a job but would like to work more hours. If it rises or is elevated as it is now, it reflects a weak economy where employers are reluctant or unable to offer their staff more hours even though those staff are keen to work more.

Adding the unemployment and underemployment rates together gives a good guide to underutilisation in the labour market and the fact this is around 14 per cent of the workforce is a worry given the headwinds confronting the economy. It is higher than at the peak during the global crisis.

In these circumstances, it is extraordinarily difficult for wages growth to pick up, as both the Reserve Bank and Treasury are hoping and forecasting. There are just too many people looking for work or hoping to work more hours for workers to go to their boss and ask for a decent pay rise. In these circumstances, it is impossible to imagine the RBA hiking official interest rates. Indeed, as this column has been arguing for some time now, it wont take much weakness in the labour market in concert with ongoing low wages growth and inflation, for the RBA to move to cut rates.


This is where the next round of wage and inflation data will be so important. If, as is likely, they remain low and there is further evidence of falls in house prices, the RBA would move to trim interest rates despite its current rhetoric which is that the next move in interest rate “is likely to be up not down” but only “if” (and it’s a big if) the economy improves.

The next few months will be fascinating for economy watchers and the markets.

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The misplaced objective of the government of delivering a surplus, come hell or high water, has gone up in smoke

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What's ahead for the Australian economy and markets in 2020

Thu, 02 Jan 2020

What's ahead for the Australian economy and markets in 2020

Happy New Year!

2020 will be a year where Australia’s annual GDP will exceed $2 trillion, our population will get very close to 26 million people and we will clock up 29 years with no recession.

It is also a year where the economy will be a dominant issue for policy makers, will drive what happens to interest rates, will help drive investment returns and will feed into the well-being of the Australian community. 

2020 kicks off with relatively good news in terms of economic growth, even though the labour market is likely to remain weak, with wages growth struggling to lift and inflation remaining below the RBA’s 2 to 3 per cent target. The Reserve Bank may have one more interest rate cut in its kit bag, but by year end, the market is likely to price in interest rate increases, albeit modestly.

The ASX, which had a great 2019 is set to be flatten out, in part driven by the change in the interest rate outlook, but it should get a boost from better news on housing and household spending.

In terms of the specifics, I have broken down the 2020 outlook into a range of categories and given a broad explanation on the issues underpinning the themes outlined.

GDP Growth

It’s a positive outlook. A pick-up in GDP growth from the current 1.7 per cent annual rate is unfolding, with the only real issue is the extent of the acceleration.