The Reserve Bank of Australia (RBA) is facing an increasingly urgent battle against rising inflation, but economists warn that their efforts could come at a huge cost to the labor market.
According to reports, leading economists suggest that if the RBA’s efforts to control inflation are successful, the unemployment rate could rise to 5.5%, potentially wiping out all the historic gains made in the labor market during the pandemic.
Bill Evans, Chief Economist at Westpac, predicts this dire outcome, stating that by mid-2025, there could be hundreds of thousands of Australians unemployed, compared to the low unemployment rate of 3.6% seen in the past 50 years. Evans believes that the RBA has shifted its focus towards urgently addressing consumer price growth, even if it means sacrificing employment growth.
Evans highlights a significant change in tone from RBA Deputy Governor Michele Bullock, who recently stated that the unemployment rate should rise to 4.5%. Evans said, “We’ve been hearing for the past year that the RBA is targeting inflation but trying to preserve the benefits that the labor market gained from the pandemic. However, this week, the Deputy Governor said, ‘We’re uncomfortable with unemployment below 4.5%.’ The goal of increasing unemployment by 1% is different from the tone of trying to maintain post-pandemic employment growth.”
The employment growth is at risk due to the RBA’s series of rapid interest rate hikes, which raised the cash rate from 0.1% to 4.1%. Evans expects further interest rate hikes at the upcoming meeting, with rates reaching 4.6% by August. He believes that the significant gap between labor supply and demand will require a much larger adjustment in the job market.
The RBA’s latest forecast predicts that the unemployment rate will reach 4.2% by June 2024 and 4.5% by mid-2025. However, Evans predicts a more severe slowdown in the economy, with unemployment rates reaching 4.6% within a year and 5.5% by mid-2025. Adam Boyton, Chief Economist at ANZ Bank, also believes that the RBA’s forecast indicates their willingness to accept a significant increase in unemployment rates.
Despite pressures from soaring mortgage costs and rising living expenses that hindered household spending growth and hit consumer confidence, there are no apparent signs of weakness in the labor market. Although employers are beginning to reconsider their hiring plans, skill shortages remain an urgent issue for many businesses.
While job vacancies have declined since their peak in May last year and have fallen below 440,000 in February, employment opportunities are still nearly twice as high as pre-pandemic levels. This situation presents a delicate balancing act for the RBA as it needs to balance controlling inflation and maintaining a robust labor market.
In summary, the RBA faces a challenging task in balancing its efforts to control inflation while preserving employment growth gains made during the pandemic. While the interest rate hikes may be necessary to curb inflation, they could come at a significant cost to the labor market. The delicate balancing act requires careful consideration of both factors to ensure long-term economic stability.
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