Tens of thousands more jobs must go to finally crack this cost-of-living crisis, economists say
The Australian economy is limping along, and many households are feeling the strain.
Bureau of Statistics figures show the Australian economy grew at 0.2 per cent in the three months to December.
It means, at least for the next few months, Australia avoids a technical recession — which is defined as two consecutive quarters of negative growth.
Deloitte Access Economics partner Stephen Smith says the newly released data shows that “while Australia is not in a recession, many Australians are in a recession”.
He says record levels of migration, exports to China, and government spending have propped up an otherwise sagging economy.
“We’ve had very strong population growth in Australia over the last 12 months or so — mostly driven by migration,” he says.
“Without that population growth, the economy would have gone backwards by about 1 per cent over the last 12 months.
“And so it’s really population growth — more people in Australia, spending more — that’s what’s propping up the economy at the moment and keeping us out of recession.”
And what about government spending?
“It is doing part of the heavy lifting,” Mr Smith says.
“Particularly in the December quarter, we saw government spending up.
“We also had an artificial boost, if you like, to our economic growth figures because we spent less on imports, and so those two things really helped to prop up economic growth in December.”
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Last year’s rate hikes are working
Elevated inflation — or the rising cost of living — is at the core of the problem.
To bring growth in prices back down to between 2 and 3 per cent, the Reserve Bank has raised interest rates 13 times, in an effort to slow demand in the economy.
And, you could argue, it’s working.
“Interest rates have risen as inflation has remained high [and] household disposable incomes have been squeezed,” RBC Capital Markets chief economist Su-Lin Ong says.
“On top of that as well, the dwelling sector, we know that activity has started to weaken quite considerably in terms of construction.
“And business investment was also fairly tepid in the quarter.
“So, it is an overall pretty weak picture, but we would remind everyone that is the idea of [interest] rate hikes.”
But 13 interest rate hikes have not brought rents, property and petrol prices, or insurance premiums back down to more normal levels.
It’s why Ms Ong believes the Reserve Bank is unlikely to cut interest rates until much later in the year.
“It is true, some of those prices are very difficult to affect from a demand perspective, but it is important that inflationary expectations remain contained — and so far they have, which is an encouraging sign,” she says.
“The Reserve Bank has one clear tool here in terms of interest rates, which does very much affect the demand side of the economy.
“That easing in demand should help temper price increases longer-term.
“Now, it’s not going to affect each component of CPI equally, but it does help that come down overall, which eventually we think will give [the RBA] scope to lower interest rates later this year.”
High unemployment on the cards
The government has committed to building 1.2 million homes over five years to ease the housing crisis.
And its measures to bring relief on energy bills, according to the Bureau of Statistics, are helping to reduce inflation.
But what if those stubbornly high costs of living don’t fall further and higher interest rates continue to strangle the economy?
Will we eventually see mass job losses, and the economic dark days that come with that?
Labour market expert Leonora Risse, an associate professor at the University of Canberra, says she doesn’t anticipate widespread job losses.
“This is a slowdown, but in some respects it has been orchestrated. It’s been deliberate, in a sense, because it is feeding through to cap inflation,” she says.
“So the idea is not to let unemployment explode and get out of control.”
The crucial question then becomes, is there a tipping point for the economy where, if the economy is sluggish for too long, then unemployment does automatically ratchet up?
Dr Risse points to the long-term unemployment rate.
“I think the key indicator there: is there a tipping point we just don’t want to go past? It’s [about] looking at [those who are] long-term unemployed,” she says.
“We don’t want people dropping out of the workforce or dropping out of employment for long periods of time, because that erosion can make it really hard to get back into paid employment.
“So I think that is the indicator to look closely at.”
Deloitte’s Stephen Smith isn’t so confident about the outlook for job seekers.
“It’s early days from the impact of higher interest rates,” he says.
“We’ve seen the Reserve Bank lift interest rates by 425 basis point [4.25 per cent].
“That’s unprecedented in the amount of time in which that increase has happened.
“And those interest rate hikes take time to flow through, so we do expect the unemployment rate to pick up.”
RBC Capital Markets and Deloitte Access Economics forecast the official unemployment rate to peak at 4.6 per cent.
That equates to roughly 700,000 Australians out of work.
Right now, according to the December labour force data, 570,400 people are unemployed.
It means a further 129,600 workers would need to be shown the door.
“The labour market is still relatively healthy, but a slowdown is coming — and the fact that interest rates continued to rise right up to November last year means there’s still that affect to take hold through 2024,” Mr Smith says.
