Economists share latest forecasts
Unemployment has dropped to its lowest level since 1974, putting pressure on interest rates for the foreseeable future, economists say.
ABS figures released on Thursday show the rate of unemployment fell to 3.5% in the June 2022 quarter. The number of employed people grew by 88,000, while the number of unemployed people fell by 54,000, data showed. It is the lowest rate of unemployment since August 1974, when the unemployment rate was 2.7%.
Commenting on the June labour force statistics, which showed the number of employed people grew to 13.6 million (seasonally adjusted), CreditorWatch chief economist Anneke Thompson (pictured above left) said while the figures were positive for employees, headwinds were accumulating within the economy.
Low unemployment means that workers feel more confident in their spending, future job prospects, and their ability to ask for and get a pay rise, she said.
“What this means is higher inflation will be with us for some time yet and it will put upward pressure on interest rates for the foreseeable future,” Thompson said.
In hiking interest rates, the RBA’s goal is to rein in demand, so people spend less, prices start plateauing, and inflation is brought under control, she said.
“It is likely the impact of the RBA’s interest rate rises will be felt more keenly around September/October, once households have had a few months of higher repayments, consumption falls, and demand for labour with it,” Thompson said.
High levels of employment reflect businesses’ capacity utilisation levels, which, according to current NAB figures, has reached 84.8%, she said.
“This level has been fairly consistent for months now, and correlates strongly with the unemployment rate. It is likely we won’t see any negative movement in unemployment until capacity utilisation starts to decline,” Thompson said.
Read more: What’s happening to Australian business confidence?
“CreditorWatch’s B2B trade receivables data, as revealed in its latest Business Risk Index, noticeably declined in June 2022. This comes after a steady few months of increases, indicating that businesses may have reached the peak of capacity utilisation,” Thompson said.
CreditorWatch data suggested business confidence was noticeably dropping off, particularly in the retail trade sector, she said.
“When consumers slow their spending behaviour, retail may be the first industry that starts to pull back on their hiring,” Thompson said.
“We also expect that the slowdown in housing market activity will impact businesses reliant on transactions in this sector, such as mortgage brokers, conveyancers, and credit providers.”
Read more: Non-major banks lift interest rates
Following the release of the June labour force data, Westpac Business Bank economist Matthew Bunny (pictured above right) told MPA the bank’s view was that the RBA would hike the cash rate by 50 basis points in August.
By the end of 2022, the official cash rate would likely land between 2% and 2.5%, he said.
“We can’t entirely rule out the possibility that the RBA scales back to a 25-basis-point hike next month. However, the strength of [Thursday’s] jobs figures arguably pushes the needle further in favour of a larger hike,” Bunny said.
The bank will get an updated inflation read later in July, which he said is likely to show acceleration of price pressures in the June quarter.
“Plus, the US Federal Reserve is on track to hike by at least 75 basis points at its next meeting in the coming weeks. Both of these developments will likely add to pressure on the RBA to continue to hike aggressively in August,” Bunny said.
