The Reserve Bank updated its economic forecasts on Friday, and while the extent of uncertainty that surrounds them is higher than usual, there’s good reason to shake off the gloom that has depressed confidence recently and embrace what might well come for the economy over the short and longer term.
Detractors will already be seething at such optimism given that the RBA’s forecasts in 2021 for low inflation were binned not long after they went to print, upsetting many as interest rates have risen sharply this year in the face of the biggest jump in prices in a generation.
Still, hang in there.
The RBA is forecasting that the unemployment rate will be at 4 per cent by the end of 2024, up from a low this year of 3.25 per cent.
It’s a scenario that suggests Australia will enter the next economic upswing with an unemployment rate at or below the RBA’s current estimate of full employment. That would be truly transforming for the economy.
RBA assistant governor Luci Ellis estimated full employment stood at somewhere between a range of “low 4s and high 3s” in percentage terms.
To those shaking their fists at the mere suggestion that the job market will remain strong through the coming years of domestic and international turbulence, it is true that there is a lot of water to flow under the economic bridge before 2024.
But it’s still worth pondering what the economy might be like in that environment.
It begs the question about what rates wages might be growing at. Australians have suffered through a decade of negligible wage increases, and the recent jump in inflation has seen real wages contract massively.
The world that is implied in the RBA’s forecasts suggest much healthier rates of wages growth, which will support consumer spending and debt reduction, and bolster investment. It would be a stronger economic profile than today in many respects.
It must also be remembered that the current job market has emerged in the wake of the pandemic lockdowns, which were deliberate efforts to shut down the economy. While buckets of fiscal stimulus were spent on the problem, it’s still a somewhat miraculous outcome.
Through the pandemic, the unemployment rate fell from more than 5 per cent to its current 50-year low. These are good outcomes.
For RBA governor Philip Lowe, who has quite intentionally propelled the economy forward in order to find where full employment might reside, a future where the unemployment remains at historical lows and wages are at last growing solidly would represent some vindication.
Earlier this year, Mr. Lowe was still championing the idea of achieving higher wages growth and full employment.
“Australia is within sight of a historic milestone – having the national unemployment rate below 4 per cent. This is important because low unemployment brings with it very real economic and social benefits for many Australians and their communities,” Mr Lowe said in February.
“Full employment is one of the RBA’s legislated objectives and the board is committed to playing its role in achieving that objective,” he added.
Job creation is always a worthy objective, and the desire to push toward it wasn’t flawed.
The RBA is forecasting a further fall in the unemployment rate to 3.25 per cent by the end of this year.
Some economists expect the unemployment rate will drop below 3 per cent at some point soon. It’s not a widespread expectation just yet, but these are numbers nobody in the current Australian workforce will have seen before.
The job market is at a rare moment in history where workers can seek better paying jobs, university graduates can find placements, and those suddenly made unemployed can bounce into new jobs quickly.
To be sure, rising inflation and surging interest rates are a problem for the economy, but the outlook will be made infinitely easier by the fact that every worker who wants a job in Australia can currently find one.
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