Economic Predictions for Unemployment and Inflation
The bank anticipates that unemployment will rise to 4.5% by mid-2025, which is expected to aid in reducing underlying inflation to 2.5% by the end of next year.
Current Job Market Overview
Currently, the unemployment rate has remained stable at approximately 4.1% since May, during which time over 221,000 jobs were created. The total number of individuals employed or seeking work has reached an all-time high.
If the jobless rate increases to 4.5%, it would indicate that an additional 75,000 individuals would be unemployed. However, Adam Boyton, ANZ’s head of Australian economics, suggests that unemployment could stabilize around 3.75%, potentially adding 50,000 jobs to the economy.
Indicators of Economic Health
Boyton indicates that various indicators, such as slow wage growth and a decrease in inflation despite a steady unemployment rate, imply that the Reserve Bank may be maintaining interest rates too high—potentially detrimental to economic growth.
“If wage growth continues to decline, inflation might further reduce, necessitating a cut in interest rates,” he argued. “We should strive to maximize employment without depending on a higher unemployment rate to decrease inflation.”
He referenced similar issues faced by the RBA before the COVID-19 pandemic.
Historical Context of Monetary Policy
In 2018, the RBA projected an imminent interest rate hike as inflation was expected to rise modestly with a decreasing jobless rate nearing 5%.
By late 2019, inflation stood at 1.9% while unemployment had just begun to decline from 5.1%.
Gareth Aird from the Commonwealth Bank stated that the RBA could allow unemployment to decrease further without aggravating inflation concerns.
Trends in Wage Growth
Wage growth has been decreasing since the start of the year, aligning with a pace that fits well within the RBA’s 2-3% inflation target range.
“The rapid decline in wage growth should provide the RBA with confidence that inflation will continue to slow and that inflationary risks are diminishing,” Aird noted.
Not only private sector analysts are raising alarms about the RBA’s perceived inflation estimates. Employment platform Seek has indicated that while the overall job market remains balanced, job-seekers are taking longer to secure positions, facing increased competition.
“Although job opportunities persist, they are not as abundant as before,” stated Seek senior economist Blair Chapman.
Concerns for Productivity Growth
The Reserve Bank has also expressed concerns regarding national productivity growth. Without improvements in productivity, it may be challenging for wages to rise, leading to fears that low unemployment will sustain higher inflation rates over time.
Professor Borland pointed out that the national productivity challenges stem partly from declines in the mining sector. A minor downturn in mining significantly influences the overall productivity levels in the country.
He emphasized that sectors that have seen substantial increases in working hours, such as human services and mining, experienced considerable decreases in productivity, indicating potential delays in training new employees or technological investments that would lift overall productivity.
Borland advocates for an unemployment rate adjustment that could safely lie between 3.5% and 4%, suggesting a balance between inflation control and maintaining a robust job market.
