When this year’s budget was delivered, Treasury forecast that the unemployment picture for the next few years was positive:
Australia’s medium-term prospects remain strong, with the economy expected to grow at an above-trend rate over the next two years, unemployment forecast to fall and the budget still on track to return to surplus in 2012–13.
While the high Australian dollar and legacy effects from the global financial crisis are weighing particularly heavily on some sectors, the overall growth outlook is strong.
Sustained high prices for our mineral resources underpin record investment intentions in the mining sector and strong forecast growth in commodity exports.
This is expected to drive strong growth in the overall economy and employment. With the unemployment rate already low, capacity pressures are expected to re-emerge. (Budget Statement 1, p. 1–5)
Figure 1: Treasury forecasts & projections, p 1–7 of Statement 1, May 2011
The RBA felt the same, writing in its February Statement on Monetary Policy that:
Employment is expected to grow at an above-average pace over the forecast period, consistent with the forecast for GDP. While growth in the labour force is also expected to remain above average over the forecast period, labour market conditions are expected to tighten gradually, with the unemployment rate declining from its current rate of 5 per cent to 4½ per cent by mid 2013.
Figure 2: RBA Forecasts February 2011
However unexpectedly, the data began to diverge from these forecasts shortly after they were penned: the downward trend in unemployment since its GFC peak in mid-2009 appeared to reverse: having fallen below the 5% level in March, it rose in May, hit 5.3% in August, and fell back only slightly in September (the fall was truly trivial—from 5.2862044% to 5.2477873%, a change of a mere 0.04%—but it was just enough to allow the rounded rate to fall by 0.1%).
Figure 3: Unemployment falls after GFC but then rises
The unexpected rise was partially blamed on the Queensland floods—which surely did have a negative impact on employment. However this should have dissipated by now—as the RBA observed, “The largest impacts of the rains on the path of GDP are likely to be in the December, March and June quarters”. This led some commentators to instead argue that the most recent data was just a statistical glitch:
The next question is, how reliable is the indicator? The job figures are based on a rotating sample survey, meaning they’re subject to sampling error (as well as a lot of opportunity for other, human errors).
They tend to bounce around from month to month for reasons you can never put your finger on but that don’t reflect the more stable reality of the labour market. The national accounts also bounce around and are subject to heavy revision as more reliable data comes to hand. So, both the key indicators are a bit ropey, and economists often use one as a check on the other… (Ross Gittins, “When is a rise in unemployment numbers not a rise in unemployment?”, SMH 12th September 2011)
I sometimes agree with Gittins, but that’s normally the exception rather than the rule. This time I’m reverting to the rule. My interpretation instead was that the rise in unemployment was due to the negative impact of slowing credit growth, which was more than counterbalancing the undeniably large stimulus coming from mining. My key metric here is the “Credit Accelerator”, which as I explained in “A much more nebulous conception”, is a causal factor behind the change in unemployment (not the level; Figure 4 simply illustrates that the rise in unemployment coincided with the collapse in the Credit Accelerator. The causal link is shown in Figure 5).
Figure 4: Credit Accelerator tending down as unemployment tends up
With the Credit Accelerator now headed back towards negative territory after the effects of the First Home Vendors Boost have finally ended, I thought it was possible that aggregate unemployment could start to rise, even though exports to China were pushing strongly in the opposite direction.
Figure 5: Credit Acceleration drives unemployment, & credit acceleration is falling
This week’s ABS unemployment data won’t categorically decide whether the “it’s just a glitch” or “unemployment really is rising courtesy of slowing credit growth” argument is correct, but the recently released Roy Morgan survey implies that the ABS data will show a continued rise in unemployment after the slight fall last month (from 5.2862 to 5.2478). Morgan’s data, which involves a much larger sample size with a much more realistic definition of unemployment than used by the ABS, has jumped sharply from 7.7 to 8.6 per cent.
Figure 6: Roy Morgan reports a strong rise in unemployment
The trend in Morgan’s survey is now distinctly for rising unemployment. If the ABS data next week confirms the trend, the Treasury and RBA forecasts of a booming economy at the beginning of the year will have to be thrown out the window—as will expectations of returning the budget to surplus by 2013. If the economy is headed back down again, this is no time to be hairy-chested about budget surpluses—deficit spending will be required to stop the economy slumping further, and indeed a deficit will be forced on the government by declining tax revenues and rising welfare payments.
However, I have no doubt that both major political parties will continue to play the “my surplus would be bigger than yours” game.
Figure 7: Roy Morgan’s data implies a rise in the ABS figure
