The best thing you can say about the Australian economy at the moment is it is not quite as bad as it was. Both the latest retail trade figures and the latest consumer price inflation showed some superficial signs of life, but they need to get even better and stay that way for a long time before we can relax.
The latest Australian Bureau of Statistics retail trade figures were up 0.4 per cent in June, as Aussies tentatively spent a little more. But it is too soon for shopkeepers to crack the champagne because, as the ABS says, “overall the retail environment remains subdued”.
Meanwhile, inflation looked a tiny bit stronger too. It was up 0.6 per cent over the past three months, but when you looked closely, half of that was due to higher petrol prices.
In annual terms, it came in lower than the target range, yet again. Australian inflation was just 1.6 per cent over the past year, as the next graph shows.
A little bit of consumer price inflation is a good thing because it usually means wages are going up. Australia targets consumer price inflation of 2 to 3 per cent per year and we have been missing the target for years, as the graph above shows.
Our current lack of inflation is both a cause and an effect of the lack of wages growth, and the Reserve Bank has admitted that neither inflation nor wages will go up until firms start hiring new workers in large numbers.
THE JOBS CONUNDRUM
The magic number is 4.5 per cent. The RBA estimates wages growth and inflation will pick up only when the unemployment rate drops below 4.5 per cent (assuming a positive labour market drags the underemployment rate down too). Unemployment now stands at over 5.2 per cent of the labour force.
Reducing unemployment to 4.5 per cent is going to require the economy to add a serious number of jobs over a seriously long period. We’re talking about tens of thousands of jobs a month.
The labour force has recently been growing by more than 30,000 people a month, as the red line in the next graph shows. (That includes everyone who has a job and everyone looking for a job.) So we need to get about 30,000 people employed every month just to keep the unemployment rate where it is.
The blue line in the next chart shows that in recent times the economy has been adding about 26,000 jobs a month.
Cutting unemployment to the level the RBA is targeting within a year would mean getting an additional 7500 people into jobs a month on top of that 30,000. We need to get about 37,500 people into jobs every month — consistently for 12 months — to achieve our wages and inflation goals. That is far more than the economy has been regularly achieving.
Record low interest rates will be part of the solution, so long as they don’t cause the housing bubble to inflate all over again. The RBA uses interest rates to control inflation — raising them when inflation is too high and cutting them when inflation is too low.
It has pledged to leave interest rates low — and potentially even cut them further from their record lows — until consumer price inflation gets back into the middle of the 2 to 3 per cent range.
“It is highly unlikely that we will be contemplating higher interest rates until we are confident that inflation will return to around the midpoint of the target range,” RBA governor Philip Lowe said last week.
That word — midpoint — implies it won’t raise interest rates until inflation is about 2.5 per cent. That looks to be a rather long way off. Since the house price dips, the RBA dares hope that lower interest rates will support economic activity this time rather than just propping up house prices.
The RBA has found supporting the economy almost impossible but it just got a boost from an unexpected source — the US. Changes to US monetary policy have seen the US dollar strengthen and the Australian dollar fall.
Exchange rates move for many reasons, including because investors like to move money to where the interest rates are highest. When the US dollar has higher interest rates, money flows there and the investors buy the US dollar, bidding its price up. That shows up as a higher US dollar.
In the most recent case, the US Federal Reserve indicated it would not cut interest rates as much as the market had expected. That was as good as a rate rise for the market, which forced the US dollar up, and the Australian dollar down to its lowest level in a decade — briefly dipping below 68 US cents.
A lower Australian dollar makes life easier for Aussie exporters as their goods are suddenly cheaper for foreigners to buy on global markets. Meanwhile, as imports to Australia get more expensive, it is easier for Australian companies to compete in our domestic market. A lower dollar also entices foreign tourists to come here.
In short, the lower dollar provides just the sort of economic conditions that could make Australian companies start hiring that magic figure of 37,500 Aussies a month. We need to hope they do.