How good IS our economy?
One of the country’s best economic writers, Ross Gittins, has been looking on the brighter side of life this week telling us that the economy is blooming and that the bad news of job losses is not as bad as it seems.
As an eternal, but hopefully realistic optimist, I love it when my colleagues from the dismal science of economics look to the positive. However, I have to ponder whether the preoccupation of what’s happening now is as important as what might happen following the Reserve Bank’s (RBA) decision to keep rates unchanged and the banks’ raising of rates.
The test
The overall test of an economy gets down to important readings such as economic growth, unemployment and inflation. Ross points out, if we take out the weather effects, which hurt the economy in the first half of 2011, we are, “travelling at about its medium-term annual rate of 3.25% for the past two years”.
In the pipeline
In February, the RBA warned that risks were weighted to the downside with annual gross domestic product growth forecasts for June 2012 cut from 4.0% to 3.5% but these were still good figures. And it should be thrown in that history says growth over 3% puts downward pressure on unemployment.
“The optimism that the Reserve Bank has shown in its longer term forecasts is largely due to the anticipated pickup in business investment...,” said CommSec economist, Savanth Sebastian. “In fact the Reserve Bank believes that ‘over the next year the level of business investment in the economy will reach its highest level, relative to GDP, in at least half a century’.”
So a lot of this optimism shown by Ross and the RBA rests on great investment ahead linked to mining and related construction in places like Western Australia and Queensland. This is primarily a mining boom and as Treasurer Wayne Swan likes to refer to it, an “investment in the pipeline.”
Europe concerns
But the RBA is mindful that the eurozone with its debt dramas and likely recession will have to be watched. And as the outlook has brightened up since the Greek parliament voted to accept austerity measures and the European Central Bank has lent 500 billion euro to cash strapped European Union banks, it makes the RBA more comfortable about their investment expectations as well as their decision to leave rates on hold in February.
This is all guesswork, however, with what happens to inflation and what goes on in Europe seen as the two key triggers for any further rate cuts.
Data watch
On inflation, the RBA’s outlook is encouraging with the underlying inflation rate tipped to ease to 2.25% in June 2012, down from 2.50%. Ross says this is expected to stay between 2-3%, the RBA’s target range, for the next two years.Meanwhile, unemployment, now at 5.1%, at this stage is not seen as a big concern. Ross says the small numbers mentioned in news stories are a personal concern but not an economic worry.
He correctly points out that there are over 11 million people in the workforce — 11,421,300 in December to be precise — and so a story screaming that 350 people will lose their jobs is only 0.003% of the total. And if it was 10,000, which can be lost in a month, the figure is only 0.09%.
Jobs in focusHowever, this is where I’m less complacent compared to Ross, but I hope he’s right and I’m wrong. What happens to jobs will be the test for the good sense of the RBA’s decision to hold on rates and the banks’ decision to raise rates. Employment fell by 29,300 in December but economists expected 10,000 and this was the biggest slump in jobs in eight months. This followed a 7600 loss in November and so the rate cuts over these two months were timely.
But that’s not all, over the entire year 100 positions were lost and that was the weakest result since 1992 when the economy had copped a recession (The fact that this number is negative is unusual compared with other years).
Looking at these numbers you would have thought a rate cut in February would not have been out of place but the RBA thought otherwise and given the January figures the Bank could be smarter than many of us think!
Employment bounced back with 46,300 jobs created and the jobless rate fell to 5.1%. And maybe Ross’s relaxed take on where we’re heading makes sense, or does it?
Turning point?
One month’s figures are never reliable and so we need to see a run of months. November and December were worrying on the back of a year that was the worst for nearly 20 years, but we could be at a turning point.
Europe and the stock market are less of a concern now, and we thought interest rates were going to fall in February and possibly another cut later in the year. However, that view is starting to be questioned with the banks putting out the message that rates could rise rather than fall.
And to be precise, the December job loss was revised up from 29,300 to 36,000 and so the CommSec economics team thinks at best the “job market is going sideways”. Annual jobs growth is 0.3%, which is the weakest in 19 years.That said, it was good to see unemployment in NSW drop from 5.6% to 5.2%, as it’s the most populist state. On the other hand, these good numbers came on the day Qantas announced 500 job losses and it added to a growing pile of big name companies that have cut positions.
Keep an eye on jobs numbers
As Ross points out, these known job losses are little compared to the 11-million plus people in the workforce but what we don’t see in the newspapers is what small and medium size businesses are doing right now. They also could be starting to cut and so we might need about three more months of employment data before we can be relaxed about job creation.As I said before, I hope Ross and the RBA are right.
Peter Switzer is the founder of the Switzer Super Report, a newsletter and website for self-managed super funds.
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