The author has been described by News Ltd as an "iconoclast", "Svengali", a pollie's "economist muse", and "pungently accurate". Fairfax says he is a "Renaissance man" and "one of Australia’s most respected analysts." Stephen Koukoulas concludes that he is "85% right", and "would make a great Opposition leader." Terry McCrann claims the author thinks "‘nuance’ is a trendy village in the south of France", but can be "scintillating" when he thinks "clearly". The ACTU reckons he’s "an enigma wrapped in a Bloomberg terminal, wrapped in some apparently well-honed abs."

Thursday, September 8, 2011

Unemployment survey rises to 5.3%: only 600 net new jobs created in last 3 months

The ABS unemployment survey, which is more timely but far less comprehensive than the GDP data, suggests the structural adjustments taking place across the economy are tracking to the RBA's plan. In the last 3 months, only 600 net new jobs have been created (ie, jobs growth has been flat). In the last six months, only 21,500 jobs have been generated, or around 3,600 per month. The overall unemployment rate has risen a nontrivial 0.4 percentage points from its nadir around 4.9% to 5.3% today (see chart).

The RBA and Treasury believe that an unemployment rate less than 5% starts generating wage and inflation pressures, assuming healthy productivity (lower productivity means inflation pressures can arrive earlier). The RBA has said that it is explicitly "trying to make room" in the non-mining economy for the boom that we are seeing in the private investment data.

So we can conclude from this ABS survey that the RBA's monetary policy settings in concert with the high currency are indeed doing their job by exerting a mild degree of restraint across the economy. Of course, as the RBA has flagged in recent weeks, we can still have high inflation in a weaker growth environment (notwithstanding that the Q2 GDP accounts tell us that growth is solid).

Recall that, in the RBA's own words, it is a "inflation-targeting central bank". The Governor's recently stated that the RBA's job is to "preserve the value of money" by achieving an an inflation rate of 2–3 per cent, on average, over the cycle. If the RBA does this, it believes that it can help contribute to maximising the sustainable rate of growth and employment over the long-run.

The Governor made it very clear that the RBA does not target employment or growth, since in the short-run these goals conflict with low inflation. A rising rate of unemployment will help the RBA achieve its inflation objectives assuming that productivity improves.

Based on core inflation measured by the ABS in Q1 and Q2, the RBA is not currently meeting its inflation target. So we wait to see the results of the fresh inflation data for Q3 released by the ABS in late October.

If it prints high again, rates will go up. If, on the other hand, it is benign, rates may not rise. The best outcome for all Australians is, self-evidently, low inflation, low interest rates, and sustainable growth.