By Rachel Clun
A softening jobs market and sluggish consumer spending figures have signalled the Reserve Bank’s run of interest rate rises could be cooling the economy, firming hopes of interest rate cuts in the second half of 2024.
If quarterly inflation figures published at the end of January fall by more than expected, some economists believe rate cuts could come sooner than currently predicted, bolstering the federal government’s pledge to provide targeted cost-of-living relief without adding to inflationary pressures.
The Reserve Bank will closely consider the unemployment figures at its February meeting.Credit: Louis Douvis
The unemployment rate for November remained at 3.9 per cent, even as 65,000 people left employment, taking the participation rate to its lowest level since May last year.
Treasurer Jim Chalmers said the combined effects of global challenges and higher interest rates were slowing the Australian economy “in expected ways”.
“Despite everything that’s been thrown at us from around the world, Australia’s resilient labour market remains one of our greatest strengths, and our unemployment rate remains near historic lows,” he said in a statement released after the Australian Bureau of Statistics released the latest labour force figures on Thursday morning.
Economists said the monthly figures were volatile, but when the past three months were compared, the numbers showed the jobs market slowing in line with the Reserve Bank’s expectations.
Oxford Economics Australia lead economist Ben Udy said the labour market was clearly softening, forecasting the unemployment rate would reach 4.5 per cent by the end of the year.
“The only thing that kept the unemployment rate from rising sharply was a large fall in the number of people looking for work,” he said.
“While we’re always cautious to avoid reading too much into a single monthly data point, the deterioration in the labour market is clearly in full swing.”
Callam Pickering, Asia Pacific economist for jobs site Indeed, said the sharp decline in employment appeared to come from a change in seasonal hiring patterns that had emerged in the past few years, and the fall followed a steep rise in employment in October and November.
He said the Reserve Bank board would be reluctant to put too much weight on the unusual figures when it met in early February.
“Inflation is more likely to be the driving force behind monetary policy in the near term. And with inflation easing considerably, we appear unlikely to experience any further rate hikes in the near term,” Pickering said.
“The inflation battle isn’t necessarily won, but it is certainly headed in the right direction.”
Reserve Bank governor Michele Bullock said in December that higher interest rates were working to take the heat out of the economy and slow inflation, after warning in November that strong demand for services such as haircuts, dentistry and dining out could keep prices inflated unless consumers cut back.
The central bank last lifted interest rates in November by a quarter of a percentage point to 4.35 per cent in its drive to get inflation back down to its target range of 2-3 per cent.
Inflation is still high, at 4.3 per cent by November’s monthly measure, but well below the peak of around 8 per cent in December 2022.
The combined pressure of high interest rates and inflation has continued to weigh on household spending.
Commonwealth Bank’s household spending indicator from December dropped by 3.9 per cent as consumers cut back across a range of categories.
The bank’s senior economist, Belinda Allen, said it was the weakest December in five years after shoppers cashed in on the November sales, driven by a 16 per cent fall in spending on household goods.
But Allen said the fall in spending on recreation (down 6.5 per cent) suggested the catch-up on holiday and travel spending after the COVID-19 lockdown years was also calming down.
“There is just maybe more evidence building that consumers are starting to wind back,” she said.
She said that slowdown combined with softer than expected monthly inflation data for November supported the bank’s view that rates would start to reduce in September.
But economists from financial services firm UBS said if the December-quarter inflation figures, published at the end of this month, were also softer than expected, that could lead to early interest rate cuts. UBS currently expects the first rate cut in November.
“If jobs and hours don’t bounce in coming months, it would allow room for the RBA to ease pre-emptively,” they said.
Prime Minister Anthony Albanese said the government would continue its fight against inflation while supporting employment.
“That’s why all of the measures that were put in place have been designed to assist cost of living, whilst also putting downward pressure on inflation,” he said in Melbourne on Thursday.
Albanese promised this week to deliver July’s stage 3 tax cuts as planned, which would give income tax cuts to anyone earning over $45,000 a year, and said the government was still exploring options for additional support in the lead-up to the May budget.
Shadow treasurer Angus Taylor said the jobs figures showed households were seeing the impact of an economy that was going backwards.
“We are seeing the impact of an economy that’s going backwards. This is the biggest fall in jobs since 1993, outside of COVID,” he said.
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