Forget Tony Abbott’s boasts about how many jobs have been created since his government was elected.
The facts are that the labour market is weak, and the incentive for business to put on more staff is low (though the ANZ job ads survey out early this week indicated employers are increasingly looking to hire).
Not only has the unemployment rate (6.4 per cent last month) jumped to its highest point in almost 13 years, the average hours worked each week is stuck around a record low 31.7 hours.
In practice, it means there is plenty of scope for employers to bump up the hours of existing staff before they need to start thinking of hiring someone extra.
Today’s labour force figures simply reinforce Reserve Bank of Australia warnings that the growth outlook is underwhelming – the central bank expects the economy to have expanded by just 2.25 per cent in the 12 months to June this year, and doesn’t expect any major improvement until into 2016.
There are some positives. The exchange rate is hovering around $US0.76, interest rates are at a multi-decade low of 2.25 per cent, petrol prices have tumbled in recent weeks and consumer sentiment has jumped.
But the improved outlook of households is likely to be short-lived as worries about job security and political turmoil in Canberra drag on confidence.
Altogether, it is not a great time to be framing a federal budget, with little reason to think that the huge slowdown in revenues from company and personal income tax will be reversed any time soon.
If ever the nation needed to have a serious conversation about broadening the tax base and reigning in tax expenditures (which were worth $113 billion in 2009- 10 alone), this is the time.
As Stephen Bartos noted in testimony to the inquiry into the establishment of the Parliamentary Budget Office, “tax expenditures are the unloved orphan of fiscal scrutiny, paid little attention and not well understood and analysed”.
It is time to change that.
Tag Archives: rba
Weak jobs, weak budget
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Nothing to see here, move along
The Reserve Bank of Australia is dangling a prolonged period of record low interest rates in front of businesses and consumers as it tries to foster economic growth in the face of what is expected to be an austere Federal Budget.
The release of the National Commission of Audit report has amped up concerns, particularly among retailers and other businesses directly dependent on household spending, that a severe Budget will crunch spending and stall growth.
While the forthcoming Budget would undoubtedly have figured in the discussions of the RBA Board, Governor Glenn Stevens was content to repeat his observation from last month that “public spending is scheduled to be subdued”.
Instead, the central banker drew attention to developments in the labour market, and their implications for inflation and, hence, interest rates.
The surprise drop in the unemployment rate in March to 5.8 per cent had some speculating that the labour market was on the improve, raising the prospect that monetary policy might soon have to tighten.
But the RBA thinks this outlook is premature.
Mr Steven admitted that there were signs conditions in the labour market were improving, but cautioned “it will probably be some time yet before unemployment declines consistently”.
Budget cuts to the public service and Commonwealth spending (including welfare payments) are only likely to prolong the period of softness in the labour market.
While this is bad news for job seekers and those hoping to trade up to a better position, weak employment growth has had a silver lining.
As Mr Stevens explains, the slack labour market has helped keep a lid on wages, which in turn has limited the ability of retailers to jack up their prices.
The result is that the cost of domestically-priced goods and services (often the driver of inflation) has been contained, and the RBA Governor said “that should continue to be the case over the next one to two years, even with lower levels of the exchange rate”.
What that means is that the Reserve Bank does not see inflation breaching its 2 to 3 per cent target band in the next two years, giving it ample room to hold interest rates down for an extended period.
While it is unlikely that they will still be this low in early 2016, it could well be late this year or even early 2015 before the RBA feels compelled to begin edging them up – notwithstanding the surge in house prices in the major cities.
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Unemployment rate drop unlikely to trigger rate hike
As economists are often wont to say, the March labour market figures are decidedly ‘noisy’.
The unemployment rate is down (a 0.2 percentage point drop to 5.8 per cent), but so is the participation rate (also slipping 0.2 of a percentage point to 64.7 per cent.
So, jobseekers were more successful last month, but there were proportionately fewer of them.
In addition, the Australian Bureau of Statistics tell us, more than 22,000 full-time jobs were lost, offset by the addition of more than 40,000 part-time positions, to push the aggregate hours worked in the month up by eight million.
A review of recent jobs data shows these numbers have been volatile. Until last month, the unemployment rate seemed to be on an inexorable rise. After hovering around 5.7 to 5.8 per cent for most of the second half of 2013, it climbed in quick succession to 6.1 per cent by February.
Over the same period the participation rate slid down to a seven-year low of 64.5 per cent (in December 2013) before jumping to 64.9 in February and settling a little lower last month.
The trend measure, which is offered as a way to ‘see through’ the monthly volatility, says the unemployment rate held steady last month at 6 per cent, and the rate of increase has slowed and may be levelling off.
Looking at the labour market through the prism of demand for workers, the ANZ job ads series suggests more employers are looking to add staff, which would be a concrete vote of confidence that better times lie ahead.
Turning points in indicators of economic activity often seems to be characterised by a period of volatility before a definite direction asserts itself, much like a sail that momentarily flaps in the breeze as a ship changes tack.
Often such turning points only become really apparent with hindsight.
But other evidence suggests that jobless rate might not have much further to climb, bringing the prospect of an interest rate hike into sharper focus.
Retail sales are firming (strong monthly gains in December and January were consolidated in February), building approvals are up more than 23 per cent from a year earlier, and business conditions and confidence are improving.
But the recent appreciation in the exchange rate (the Australian dollar surged to US94.3 cents following the release of the jobs data) is a clear risk for the RBA, which has been keen to see the currency lose much of its altitude.
Today’s activity shows the currency markets are primed to exploit even the hint of an increase in the interest rate differential between Australia and the US, where confirmation by the Federal Reserve of a US$10 million cut in bond purchases under the quantitative easing program saw the greenback lose ground.
The stronger $A will also hamper the shift in the economy away from resources-led activity toward other sources of growth, possibly prolonging the nation’s lacklustre GDP performance.
A turn in the labour market, if that is what this proves to be, is unlikely by itself to convince the RBA Board to hike rates – particularly while wage inflation appears so tame.
A more probable prompt for a rate rise would be increasingly uncomfortable signs of heat in the housing market, particularly credit growth. So far, the warning signs on this front are amber, rather than flashing red.
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The case for regulation
Taking unfashionable positions seems to be part of the job description for central bankers.
And the Reserve Bank of Australia was at it again yesterday.
The Abbott Government has been trying to endear itself to the business community by talking up its campaign to slash red tape, headlined by its so-called Repeal Day on March 26, when 10,000 pieces of legislation and regulation were put on the chopping block.
Few would quibble with the move to get the Dried Fruits Export Charges Act 1927, which set a levy of one-eighth of a penny for each pound of dried fruits exported, off the books.
But, as the RBA pointed out in its submission to Financial System Inquiry, the mania to be rid of regulation must have its limits.
Reflecting on the nation’s ability to endure the global financial crisis in much better shape than most other major developed economies, the Reserve Bank said Australia’s “sound prudential framework” had served it well, and saw no need for major change to current arrangements.
Many in the finance sector chafe under what they see as the unfair regulatory burden and capital requirements placed on Australian banks in complying with the terms of the international Basel III rules.
The rules were developed to help reduce the vulnerability of the global financial system to future credit shocks, including by increasing capital adequacy requirements for banks.
While the RBA and APRA are among those who successfully argued for some leeway in applying the new standards to take account of different business models and operating environments, Australian banks have nonetheless – like their overseas counterparts – had to increase the amount of capital on hand to help offset liabilities.
Often, regulation is seen as a dead-weight cost without any perceptible redeeming benefit.
In this it is like investing in education with the aim of boosting national productivity – the upfront cost is all-too apparent, while the pay-off is distant and rather nebulous: you know that a better educated and higher skilled workforce will be more productive, but credibly quantifying the effect is difficult.
That is why there was some benefit out of the gloom caused by the GFC. As the RBA said in its submission, it showed “that the costs imposed by effective regulation and supervision are more than outweighed by the costs of financial instability, even if that differential only usually becomes apparent after prolonged periods”.
That is, financial crises only happen every now and then, but when they do, the insurance of a robust financial system is worth the regular but relatively small cost of regulation.
In keeping with this “nothing good comes for free” theme, the RBA also backs the idea that the banks be charged a fee for the protection to depositors provided under the Financial Claims Scheme.
One of the key lessons the central bank draws from the GFC is that “the financial cycle is still with us”, meaning that risks have to be managed.
In its submission to the inquiry, the RBA made a number of other noteworthy observations and recommendations.
While much attention in recent years has been on competition in the mortgage market, the central bank said competition in small business lending was much weaker and deserved greater attention.
It also warned politicians off the idea of forcing superannuation funds to invest in certain sectors or asset classes, and questioned whether or not the fees and costs charged in managing retirement savings were reasonable.
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Outlier 