The Australian economy is showing signs of slowing down, with the unemployment rate rising and job vacancies decreasing. The Reserve Bank of Australia (RBA) faces a difficult decision on whether to raise interest rates in the coming weeks. According to recent data, the unemployment rate has increased from a near 50-year low of 3.5% in mid-2023 to 4.1%.
This sharp rise and broader economic weakness suggest that unemployment may continue to increase in the coming months. The RBA’s upcoming meeting in early August is expected to be critical. In its last forecast round in May, the RBA predicted that the unemployment rate would peak at 4.3%.
However, this prediction now seems optimistic, given the recent loss of economic momentum. Despite the weak economic growth and rising unemployment, the market appears to be pricing the possibility of interest rate hikes within the next few months. Many market participants have highlighted the local June quarter inflation data, set for release on July 31, as a potential trigger for a rate hike.
However, the RBA is likely to revise its inflation forecasts for 2025 and 2026 lower, considering the deteriorating economic outlook and the impact of government measures such as electricity and rent assistance. An “on hold” decision on interest rates is highly likely, even if the inflation rate slightly exceeds expectations.
Rising unemployment impacts Australian growth
The RBA’s mandate to maintain full employment alongside 2-3% inflation is at risk, with the unemployment rate on an upward trajectory. A rate hike could be viewed as a significant policy error. The RBA could present a realistic economic outlook where growth remains weak at around 1-1.5%, the unemployment rate approaches 5%, wage growth eases to 3-3.25%, and inflation stabilizes within the 2-3% target by September 2024.
Given this scenario, a rate cut shortly appears more probable. In addition to the rising unemployment rate, the latest employment data shows a significant downturn. The Internet Vacancy Index (IVI) plunged by 4.2% in June, marking an 18.1% decrease year-on-year.
This was identified as the “strongest monthly decline since September 2022,” with online job advertisements dropping by 50,200 compared to June 2023. Recruitment activity decreased across all states and territories and impacted all skill-level groups. Further economic indicators show that business conditions eased in Q2 due to slow economic growth and subdued consumer demand, negatively impacting firms’ trading conditions and squeezing profitability.
As the Australian economy navigates these complex dynamics, policymakers and businesses must carefully consider their next steps to address these challenges. The RBA’s decision on interest rates will be closely watched, as it could have significant implications for the Australian dollar and the broader economy.
