The Reserve Bank of Australia (RBA) faces a challenging decision as it prepares to meet next month amidst a slowing economy and rising unemployment. In June, the economy grew at its weakest non-pandemic pace since the early 1990s, with annual GDP growth at just 1.1 percent and no signs of improvement on the horizon. At a near 50-year low of 3.5 percent in mid-2023, the unemployment rate has now climbed to 4.1 percent.
As the economic weakness persists, higher unemployment rates are anticipated in the coming months. Given the recent economic slowdown, the RBA’s May forecast of a 4.3 percent peak in unemployment now appears optimistic. Counted in people terms — the number of unemployed individuals has increased by 117,000 since October 2022.
While there are similarities with the US labor market, where unemployment has also risen from 3.5 percent to 4.1 percent over the past year, the US economy has maintained a resilient GDP growth of around 2.5 to 3 percent. In contrast, Australia’s GDP growth has plummeted to a non-pandemic, 32-year low of 1.1 percent.
Rising unemployment confronts RBA decisions
Market participants are closely watching the upcoming June quarter inflation data, due on July 31, as a potential trigger for a rate hike. However, considering the economic slump and rising unemployment, the RBA is expected to revise its inflation forecasts for 2025 and 2026 downward, considering government measures such as electricity and rent assistance. This makes staying “on hold” a highly probable decision.
Even if inflation slightly exceeds expectations, the weak economy, rising unemployment, and heightened economic stress will likely be the primary factors in the RBA’s decision-making process. The RBA’s mandate is to maintain full employment alongside 2 to 3 percent inflation. With unemployment on the rise, a rate hike would be seen as a significant policy error.
Forecasts indicate that economic growth will remain weak at around 1 to 1.5 percent, unemployment could approach 5 percent, and wage growth may ease to 3 to 3.25 percent. Inflation will align with the 2 to 3 percent target by the next quarter. As a result, it appears probable that the next move in interest rates will be a decrease.
