Unemployment rate steady but RBA still likely to cut interest rate further

Ross Greenwood speaks to ANZ head of Australian Economics David Plank as the unemployment rate has remained steady at 5.2 per cent but participation rates are at record highs.

Ross Greenwood: As I indicated the Australian unemployment right today was out came in at 5.2% that was steady but it doesn’t tell the full story here because there was a lot of part-time jobs created. Some suggest it might’ve had something to do with the election period where a lot of part-time employment does stay in the crop up just for that month or so. On top of this also if you consider then in the past year, trend employment in Australia grew by 330,000 jobs and that’s above the averages of the past 20 years and even the number of hours worked increased by 2.5% in the past year. Again, well above the 20-year average so these are good statistics for Australia.

Then you go to the Reserve Bank and you consider that the Reserve Bank right now is cutting into strides by concentrating on employment data. It basically says that it wants full employment which it sees around 4.5%. We’re at 5.2% it wants 4.5% it’s cut the interest rates as a result. I just wonder whether they’ve got the full story here. Let’s bring in David Plank, the ANZ Banks hit of Australia economics and David, I appreciate your time.

Interview with: David Plank, ANZ, Head of Australian Economics

David Plank: Good to be on the call.

Ross Greenwood: These are again strongly employment numbers they’re good numbers. Everybody keeps asking well if they have such demand for labor right now wages don’t rise. It’s a conundrum that the Reserve Bank hasn’t yet worked out if you worked out. Have you worked it yet or not?

David Plank: I think the Reserve Bank it has worked it out. What it’s concluded is that it’s still quite a bit of slack in the labor market. The unemployment rate really understates that to some extent but we’ve seen over the last 10, 15 years as a rise in part-time employment. A lot of that is designed a lot of people want to work part-time but as part-time employment’s gone up there’s more and more workers that can work extra hours if you like. Underutilization, when it counts the number of people who would like to work some more hours with unemployment where you find is that number is actually still pretty high. There’s still quite a lot of slack in the labor market and that’s what basically the RBA is concluded. Given that they need to get the unemployment rate down a lot further to push wages up.

Ross Greenwood: Isn’t one of the real basic things and here we go back to basics households. Might a lot of people know there’s pressure on wages right now and so a lot of people might’ve gone out and taken a mortgage when house prices were higher so they got big mortgages. They’re not getting pay rises key cost of living things such as electricity, insurance, other things have risen. Isn’t it also the case when I look at the participation rate so the number of adults who are capable of working there’s now a participation rate at record levels, I suppose, on 66%. Now, if that’s the case it seems to me that a lot of families that decided they need the other partner in the workplace earning more money to basically sustain not only they’re increasing costs but also their lifestyles. Is this a part of the reason why that lots more people I’ve just suddenly put their hands up and say, “Hi, we’re available to work we’re in the workforce now.”?

David Plank: That’s why the unemployment rate hasn’t come down as much as you might have expected given how strong and employment growth has been. Without the rising participation rate, there’s a good or a bad thing. It depends really I think creating more opportunities for people to work and whether that’s part-time or full-time is a good thing. There are countries around the world, our next door neighbor, New Zealand it’s got a much higher participation rate than us. They could continue to go high as people get healthier on the older age and there’s attitudes change but also maybe the pressure of the life. The costs that you see on some of the things you mentioned some of those people perhaps it’s a necessity rather than something that they wanted really want to do. [crosstalk]

Ross Greenwood: Because I want to challenge you on this, David, and maybe even challenge the Reserve Bank on this. Because if the participation rate was let’s say where it was three years ago let’s say, for example, and it was lower than what it was today, the unemployment rate right now could very well be falling, falling back into the fours. It could be getting closer to where the Reserve Bank sees full employment around that 4.5% mark which would mean it wouldn’t have really had to have cut interest rates. The truth is that more people are wanting to get jump into the workforce and it’s because of this participation rate. The fact that families need more in common and are looking for ways in which they can earn that income. That that’s the thing that’s actually driving this participation rate higher. As a result, the Reserve Bank is not getting close to its employment or its desired unemployment rate that it would like around that 4.5%.

David Plank: That means that the potential growth rate of the economy is perhaps higher so we need to grow faster. That RBA’s contribution today that would argue that there’s other policies and they would love other things to be done but their contribution today is through monetary policy. There’s really not much else they can do other than just rates. That’s what they’re doing because if they don’t do that they’re going to miss their inflation target or continue to miss it. We covered some research today we just highlight the fact that the inflation expectations have been falling and the longer they stay low the more difficult the job the RBA gets it’s run out of patience, if you like.

Ross Greenwood: It’s run out of patience but at some stage, it also runs out of interest rate caps. If it gets them down to one which is broadly expected in August and then from there it’s now standing and looking in the dark hole of very close to zero interest rates. That’s something it also has to contemplate in terms of what its role is in Australia’s monetary policy.

David Plank: People have been arguing that may be the cure is worse than the disease because the low inflation how big a problem is that the reason we’ve got low inflation is in ways for good is because of falling prices trends and others. Lots of things we buy so some things are going up and most of the things are going down in price. Maybe the cure is worse than the disease but the RBA when pushed is and still thinks the appropriate inflation target is 2% to 3%. The good thing is that they’ve been asked saying actually we can hit a much longer on the product life than we thought five years ago or even a couple of years ago. That’s ultimately a good thing but they would like some help.

Ross Greenwood: They’d like some help on what your side there is they’d like more tax cuts and they’d like more infrastructure rolled out by the federal government. They are the key areas that they could get some assistance from the government, isn’t it?

David Plank: Yes. That also likes some I think fundamentally what the governor said last week is that the thing that he would like the most is actually structural reforms that boost productivity and so on. They don’t actually generate inflation actually so they were initially help on the inflation side but they’ll make that even easier to get me out pull it right down. If you had some structural reforms have improved that is the flexibility of the labor market and so on. The likelihood of that I think in the current political environment is pretty low, I’d say.

Ross Greenwood: Final one for you today is that results from the employment numbers would not change the outlook for interest rates into the future with most suggesting another interest rates coming in August this year. Is that pretty much where you’re at it?

David Plank: There’s some talk about whether they go in July. It was unlikely and today’s data was always going to be difficult to interpret because a strong number like we got was largely due to the election. The employment of people to help count those votes. We’ve got a week one and you can blame it on the election as well as employers were nervous about hiring people a couple of weeks out from the election. Either way, I think today’s data was always going to be one that you let go through to the key players. It’s just one of those ones. It’s difficult to interpret.

Ross Greenwood: I’ll tell you what, David Plank, it’s always good to have you in the program. We appreciate your time, certainly.

David Plank: Cheers, good luck.

Image source: 2GB

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