In Australia it is Unemployment Vs Inflation – Which Will Win Out?

Confusion dominates the outlook for the economy and for monetary policy.

That unusual level of uncertainty has been triggered by conflicting data, one side showing a further weakening in the labour market with stalling job creation and rising unemployment in line with a still subdued economy versus a shock lift in inflation in the September quarter which in theory is in line with a strong economy.

Such in the conundrum, that the RBA is signalling a firm ‘on hold’ position for official interest rates until the dust settles on which of these indicators is providing the right signal on the economy. Recall that the RBA has a mandate of setting policy to achieve full employment whilst maintaining an annual inflation rate between 2 and 3 per cent.

Internationally, economic growth remains generally moderate with a lot of focus on the US government shut down, sovereign debt levels and the stubbornness of inflation. That said, financial markets continue to trade relatively smoothly, with bond yields generally edging higher and most stocks markets remaining strong.

There remains a strong tendency among central banks to cut or at least hold interest rates steady.  In the past month, interest rates have been cut in the US, Canada and New Zealand.

Australia

The data on the economy remains mixed and if anything, points to ongoing annual growth at or just below 2 per cent, which is short of the pace needed to keep the economy at full employment.

The recovery in household spending has stalled in the September quarter with a rise of just 0.2 per cent n real terms. At the same time, dwelling construction, consumer sentiment and business investment levels are flat and below par. Early indications from various budget measures show a scaling back in the level of public sector demand which is likely to have a negative impact on the labour force and bottom line economic growth.

The Federal government will reveal an update on the budget in the Mid Year Economic and Fiscal Outlook in December.

The unemployment rate jumped to 4.5 per cent in September, up from 3.4 per cent at the trough in 2022 and 4.0 per cent at the start of the year. Employment growth has effectively stalled in the last five months with an average monthly increase of just 7,000 which well below the pace of job creation needed to hold the unemployment rate constant. Job vacancies and advertisements remain flat to down.

House price growth continues to pick up as a shortage of dwellings listed for sale and unexpected strength in net immigration underpins demand. Nationwide prices have risen a solid 2.9 per cent in the last 3 months, with the strongest gains in Perth and Brisbane.

New Zealand

The RBNZ reacted to the recent shock of GDP falling 0.9 per cent in the June quarter with a 50 basis point interest rate cut. In announcing the cut, the RBNZ noted the recent weakness in economic activity which offset what was more favourable economic news during the first half of the year. The large interest rate reduction was despite the September quarter inflation rate rising to 3.0 per cent, which was driven by a series of what were considered ‘one-offs’.

The RBNZ has cut interest rates by a cumulative 300 basis points since August 2024, in contrast to RBA interest rate cuts of just 75 basis points, so far, in this cycle.

House prices remain weak, having fallen 17 per cent from the peak. This is acting as a drag on household spending and consumer sentiment.

Currencies

Over the past month, currency markets have been relatively calm with the AUD trading in a range of 65 to 66 US cents and the NZD holding around 58 US cents. The AUD NZD cross remains near a decade high around 1.1450. Both currencies are being impact by a flat period in commodity prices and investor uncertainty on central bank policy.