Tag: Aggregate Monthly Hours Worked

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Australian Jobs versus Rate Cuts

The RBA is expected to cut interest rates by 50 basis points next week, with a further 25 basis points in June, according to the NAB economics team.

CPI declined to a low annual rate of 2.4% in the first quarter, well within the RBA’s target range. However, the rate jumped to 0.9% (3.6% annualized) in the latest quarter.

Australian CPI - Quarterly & Annual

While this gives the RBA some leeway, the labor market remains strong, warning of the dangers of cutting too early.

Unemployment is a healthy 4.1%.

Australia: Unemployment

Employment continues in a strong uptrend.

Australia: Employment

The wage price index reversed its recent decline, rising by 3.4% over the past 12 months, while the quarterly rate increased to 0.9% (3.6% annualized), signaling underlying inflationary pressure.

Australia: Wage Price Index

However, monthly hours worked dipped slightly, with the monthly trend falling by 0.1%, warning of a slowdown ahead.

Australia: Aggregate Monthly Hours Worked

Business confidence is also weak. NAN April business confidence remains below zero, while current business conditions are steadily declining.

NAB Business Confidence & Conditions

Cash flows are suffering, according to the NAB business survey, falling to their lowest level since 2020.

NAB Business Cashflow

Forward orders have been contracting since 2023.

NAB Business Forward Orders

The slowdown has affected the retail and wholesale industries the most, but mining and transport & utilities show the steepest monthly declines.

NAB Business Forward Orders by Industry

Declining capital expenditure warns of an economic contraction and slowing growth ahead.

NAB Business Capital Expenditure

Conclusion

The Australian economy is gradually slowing, but unemployment remains low, leaving the RBA with a difficult choice: cut rates in anticipation that unemployment will rise, or wait for the actual data? We would argue that they should hold firm while unemployment is low, but that seems to be a minority view.

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Made in Australia

The Australian labor market remains tight, even with unemployment rising to 4.1% in April. The trend (light blue) is at 4.0% — still well below its pre-pandemic low of 5.0%.

Unemployment

The economy is growing, with aggregate hours worked rising to 1,962m in April. The trend (light blue) still points upward.

Aggregate Monthly Hours Worked

Wage Rates

The wage price index (WPI) ticked lower, to 4.09% for the 12 months to March ’24, while quarterly growth fell to 0.8% (3.2% annualized), warning of further slowing ahead.

Wages Index

The chart below, from Shane Oliver, shows how inflation has eroded real wages (blue) over the last three years. Slowing nominal wage growth suggests that workers are going to struggle to restore real income to pre-pandemic levels.

Real Wages

Made in Australia

Treasurer Jim Chalmers revealed long-term plans to spend $22.7 billion on clean energy and strategic industries as part of Labor’s Future Made in Australia program. From the ABC (emphasis added):

Sydney-based SunDrive is one of the big winners of a budget that is investing major money into a “Future Made in Australia”.

The solar panel start-up has a new technology that replaces expensive silver with cheaper copper in a high-efficiency solar panel, developed from research done at UNSW.

But unlike previous Australian solar technology advances, which powered China’s dominance in producing panels, SunDrive’s founders want to manufacture at least some of their product onshore.

“Australia has led the world in solar innovation — today’s commercial solar cells were invented in Australia, Australia has held the world record efficiency for 30 of the last 40 years,” SunDrive CEO Vince Allen said.

“However, very little of the economic value that has been produced has been captured in Australia from its solar R&D efforts….”

Australia is unlikely to succeed in manufacturing any new technology at scale until it achieves structural reforms to boost the country’s international competitiveness. Costs of labor and energy are two of the largest impediments to establishing new industries here.

Australia enjoys similar median income to France, Germany, Canada and Japan — and similar electricity prices — but all of these countries are losing manufacturing industries to competitors with lower cost structures.

Electricity Prices in US$/kWh

The biggest impediment for many poorer countries is political stability and corruption. Countries, with lower cost structures, that can solve these two challenges are likely to attract new industry to their shores.

Conclusion

Real wages in Australia have been eroded by inflation over the last three years. Most major political parties seem to agree that the way to address inflation is to encourage immigration to drive down labor costs. That has backfired, with rising shelter costs contributing to stubbornly high CPI. Real GDP per capita instead is falling as a result of high immigration and high inflation.

The Australian economy is largely supported by mining, housing and service industries. The only way for government to re-establish a manufacturing base here, is to attract new investment by addressing structural issues that cause high manufacturing input costs. Offering incentives for a few high profile projects does not address the underlying structural issues and leaves them reliant on government handouts for their existence.

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