With inflation rising and talk of a possible recession, Australia’s low unemployment rate may not be cause for celebration
Have you ever had the “tap on the shoulder”?
Those who have will understand this phrase. It’s when your boss asks to see you “for a chat”, closes the door and informs you your position within the organisation has been made redundant.
So why raise this idea when this week Australia’s unemployment rate fell to 3.5 per cent — the lowest level since 1974? Surely redundancies are as rare as hen’s teeth right now?
A major international bank and an independent economist are now forecasting Australia’s unemployment rate will rise by a full percentage point by late next year.
This, they say, will produce a mild recession in Australia, but not one that will be recognised more broadly or officially defined.
Let’s explore this idea.
The backdrop to a ‘recession’
This week inflation in the United States rose to its highest level since 1981, up 9.1 per cent.
And it’s the things people need day-to-day that are rising in price the most.
Gas and electricity rose 7.5 per cent in June, petrol rose 11.2 per cent, and the cost of transport rose 2.1 per cent.
“So, heating your house, filling your tank — that’s where Americans are really feeling it,” former economic advisor to the Obama Administration Betsey Stevenson told The Drum. “And, if we look at the data, about half of this month’s increase in inflation was due to fuel [and] that big surge in energy prices.”
Is there worse to come? It’s impossible to know for sure, but the key drivers behind much of the international inflation we’re seeing — namely the war in Ukraine and the pandemic — are not going away any time soon.
It’s led several major banks, including the National Australia Bank, to conclude soaring inflation in the US and across the globe, and the need to raise interest rates quite sharply in the coming months, will produce recessions in the world’s biggest economies.
Global growth, the National Australia Bank noted, “will be under considerable pressure over the next year, with the risk of recession in one or more advanced economies elevated. Our forecasts are consistent with mild recessions in the US, UK and the Euro zone.”
This is hardly scientific, but BetaShares chief economist David Bassanese warns that when a major economy like the US heads south, Australia follows.
“I now see a US recession as likely within the next 12 months,” Bassanese says.
“The challenge for Australia is that when the US sneezes, we usually catch cold.”
And, as is evident in the chart below, he adds, the Australian unemployment rate has increased by at least one percentage point in each of the past five US recessions.
An Australian recession?
This is where global investment firm Deutsche Bank is sticking its neck out a bit.
It says it recognises that the accepted Australian definition of “recession” should be challenged.
Its argument is simple: recessions are defined or associated by short, sharp increases in the number of people joining unemployment queues.
When you and many other workers receive the “tap on the shoulder”, the competition to re-enter the workforce increases, and therefore the chances of landing another job fall.
This would be financially painful for many households if it coincided with elevated inflation.
“We think a relatively large rise in unemployment over a short period of time is a more useful definition of recession for Australia than the ‘accepted’ definition of two consecutive quarters of negative growth,” Deutsche Bank’s chief economist Phil O’Donoghue says.
“It makes more sense from a welfare perspective and, unlike GDP growth, unemployment isn’t directly impacted by Australia’s relatively high migration rate” — at least pre-COVID.
The wild card: consumer confidence or happiness
At this moment in time you could argue there’s no issue on the economic front.
The unemployment rate is low, those on the minimum and award wages have just received a boost to their pay packets, economic growth remains around what economist call “trend” and consumers or shoppers continue to spend at the stores.
The problem is that, according to ANZ, NAB and Westpac, levels of consumer confidence have plunged to levels normally associated with recessionary conditions.
Indeed, the National Australia Bank believes the pull-back in consumer spending has already begun. It noted:
“Our data mapping points to a small negative retail sales print in June. We see the official ABS measure dropping 0.1 per cent on a month-on-month basis as nervous consumers react to weaker economic expectations, high inflation and rising interest rates.”
One issue is that shoppers can’t see an end to the price rises.
“Consumer inflation expectations over the next two years hit a 15-week high of 6.0 per cent,” the ANZ Bank noted.
They may well be right, too, says Deutsche’s Phil O’Donoghue.
“While Governor Lowe has recently indicated he expects Australia’s headline inflation to rise to around 7 per cent by the end of the year, we think the risks are skewed to Australian inflation being even stronger than that, and that a US-style inflation profile is not at all out of the question,” he says.
The brace position
Unit rents across Australia’s capital cities combined, as measured by property website Domain, have now risen for 12 straight months. That’s a record run of rental price increases.
Some banks expect the Reserve Bank to raise its cash rate target by as much as 0.75 percentage points next month.
This will increase both mortgage rates and the cost of renting.
“Because we’re stuck in a situation in which you know the owners are now paying higher interest,” says Betsey Stevenson.
“They’re going to pass that on to their renters who are going to pay higher rents.”
With no end in sight for some of the main drivers of inflation, like the war in Ukraine and the pandemic, millions of Australian households are bracing for further cost of living pressures.
Workers in the United States have been partially compensated by rising wage growth, but this is not the case for many Australian workers.
The government’s Jobs and Skills Summit will in six weeks’ time attempt to wrestle with this problem.
“[There’s] a need to work collaboratively with businesses and the unions to boost productivity, to boost skills and training, and to boost wages and job security so that workers also see a dividend from this very very strong labour market,” Acting Employment Minister Mark Butler said.
Do you see the irony here?
Workers are currently receiving a record low share of company earnings. If wage growth was higher, and employees earned more, they would likely be more confident to spend their money at the shops — which is a key driver of Australian economic growth.
It’s a funny old economy where achieving almost full employment is met with shaky shoppers and talk of recession.
It should be a time when workers are full of confidence, and yet many dread the idea of being out of work or without income.