‘Smoking gun’ that will ‘force RBA’s hand’
OH DEAR. This is what we didn't want to see. Nothing's bloody working.
Despite the RBA cutting interest rates twice, in early June and early July, and the Government lining our pockets with nice fat tax returns, the economy has shrugged.
The RBA and the Government would have been biting their nails ahead of the release of the latest labour market figures on Thursday, desperately hoping for a little bit of a move in the right direction. They didn't get it.
Instead, things went the other way. Unemployment rose ever so slightly in August, but it was enough to shift the official number from 5.2 per cent to 5.3 per cent. And underemployment went up sharply, confirming that in our economy, it is not easy to get the hours you want.
Australia's "natural" rate of unemployment is estimated at 4.5 per cent. That's the level where we can expect decent wages growth to really kick in. And for a while we were making progress toward that point. But as the next graph shows, recent progress has been reversed, and the unemployment rate is back up to where it was a year ago.
There is some good news in the figures. The Australian economy is still getting people into work. After balancing out all the people who moved into work, and all the people who moved out of it, the economy put 35,000 people who were previously not working into jobs in the month of August in seasonally adjusted terms. So that's a good sign.
When things are really bad, you get net movement of people out of jobs, and we're not going that badly, thank goodness.
Now, you might be wondering, how can we have a rising number of workers and rising unemployment? The reason is that adding 35,000 new workers in a month is not enough right now. The working population is always growing. More young people are becoming adults than there are old people retiring. Women are working much more than in the past. Migration is adding to the labour force.
But it's not just about having more Aussies of working age. A record proportion of Australians are participating in the labour force (either working or looking for work) as the next graph shows.
Why is participation so high? After all, we used to hear that our ageing population was going to cause labour force participation to collapse. One answer might be that with weak wages growth, families are needing to work more and longer to make ends meet.
Parents go back to work sooner after having kids and/or retirement is delayed a few years.
There is more bad news about the 35,000 net people who got into work in August: Most of them ended up in part-time positions. The economy added an estimated 50,000 part-time roles and lost 15,000 full-time roles in seasonally adjusted terms.
That doubtless contributed to the increasing share of people who wish they could get more hours. Underemployment is up as the next graph shows.
WHAT TO DO, WHAT TO DO?
The first response to this situation is simple: do more with the tools we've always used. You can now expect another cut in interest rates. Commonwealth Bank economists think the RBA will cut ASAP when the RBA board meets at the start of October.
"We believe that today's labour force data is the smoking gun that will force the RBA's hand," said CBA economist Gareth Aird in a note to clients.
The RBA will not be the only institution under pressure to act. Treasurer Josh Frydenberg will be too. Unlike the RBA, which is nearly out of ammo, the Treasurer is in a good spot to actually do something.
All those extra people participating in the labour force will be paying taxes, and that makes it even more likely that Mr Frydenberg can find money in the Budget to help get the economy moving.
We all know he wants to deliver a surplus. Personally, I think that's a bad idea when the economy is sputtering along like it is right now, and the money (our money) would be much better off circulating in our economy.
But with higher tax revenues, it raises the prospects he can do both - deliver a skinny surplus and also spend a chunk of money to try to stop unemployment getting worse.
So that's how monetary policy and fiscal policy will likely respond. A swift rate cut and some begrudging government spending. But the weakness in the Australian economy raises big questions about whether, in the long run, we know enough about why economies do well some times and poorly at others.
In theory, our long era of low interest rates should have generated lots of inflation, wages growth and a higher GDP per capita. Instead, it has generated mostly higher asset prices and stagnation. We see similar situations overseas.
The ongoing weakness has been strong enough that no less of an economic institution than Alan Kohler has been arguing for something called "helicopter money".
That's where the RBA just creates money and puts it in our bank accounts. Sounds nice, doesn't it? But this idea being discussed in serious circles is a worrying sign that we are not too sure why things have got so bad, nor what to do about it. Oh dear.