The October data confirmed the unemployment rate at 3.7 per cent, equal to the highest rate in the current economic cycle and above the low of 3.4 per cent registered late in 2022. The actual number of people unemployed rose by 28,000 in October to be a sizable 64,000 more people than at the low point in late 2022.
One of the big issues for the community and policymakers is how high unemployment goes in the next year or two as the excessive interest rate hikes from the Reserve Bank (RBA) hit the level of economic activity.
The RBA is forecasting the unemployment rate to rise to 4.3 per cent in the next 12 to 24 months, which translates to a trough-to-peak lift in the number of people unemployed of around 175,000.
The risks are building that this will prove to be optimistic, with unemployment being even higher than the RBA is estimating because the economy will be weaker than it is assuming given that the low point in the business cycle is not even on the horizon.
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The number of job advertisements and job vacancies are falling away at a steady pace. They have been for a year. Businesses are effectively saying the slower economy is hurting their takings and, with costs rising, they are scaling back the growth in the number of staff they are hiring and the number of hours each worker is working.
Hence the inevitable rise in unemployment into 2024.
The surge in immigration over the past 18 months is also impacting the labour market. All of a sudden, it seems, the labour market skills shortages that were evident for many businesses when the borders were closed due to COVID restrictions have been replaced by more workers being available to fill vacancies.
The number of applicants to each job vacancy is rising, a sure sign of an economic downturn.
Where to for interest rates?
In Australia, after the shock November interest rate hike from the RBA and the run of recent economic data, the money markets are broadly anticipating an extended period with interest rates on hold. There remains a perception in some quarters that the RBA could keep hiking given its inflation forecasts but this is being broadly offset by the weaker economy, rising unemployment and the fact that inflation is falling.
Overseas markets are reacting to falling inflation and the genuine risk of recession by building in expectations for a series of interest rate cuts, starting within six to nine months.
In the US, for example, market expectations are for 150 basis points of interest rate cuts by the latter part of 2025. Interest rate cuts are also widely anticipated in the Eurozone, Canada, the UK and New Zealand for the clear reasons of rapidly falling inflation and a deep economic downturn.
The RBA has already been playing with fire with its aggressive interest rate hiking cycle, which means the risks are heavily skewed towards a truly worrisome rise in unemployment.
It is why the next move in Australian interest rates is likely to be down.
To get there, what is needed is an economic scenario that confirms the unemployment rate hitting 4.5 per cent or more, with inflation tracking at an annualised rate under 3 per cent and there being subdued conditions in the global economy.
Such an about face from the RBA from hikes to cuts is unlikely in the next few months.
By mid 2024, many of the preconditions for interest rate cuts are likely to be in place or close to being in place. Get set for more talk of ‘rates on hold’ and for speculation to emerge about the timing of interest rate cuts.
Higher unemployment will play a large part in determining the timing of the first rate cut.