Weakening labour market signal more rates

The health of the Australian economy continues to worsen as the jobless rate in December rose to its highest level in 21 months.

Data out this week from the Australian Bureau of Statistics showed that the number of full time jobs fell by nearly 44,000 to 7.64 million, seasonally adjusted. This is the highest level of unemployment since March 2007 and represents an unemployment rate of 4.5 per cent, which is up from 4.4 percent in November. Although the data was in line with the market’s expectations, it was still a weak overall result.

Most economic commentators are predicting more job losses and further deterioration in the Australian economy as the global financial crisis continues to play out. Newspaper and internet advertisements out this week recorded sharp falls as employers reduce their headcount as the likelihood of a recession increases.

Some economists have suggested that a ‘deep labour market adjustment’ is on the way, with unemployment rising as high as 6 per cent by the end of 2009 and 10 per cent by the end of 2010.

This means that the Reserve Bank will be forced to ease rates further over the next few months in order to prevent Australia from tipping into a prolonged recession. The economy only needs to record two consecutive quarters of negative growth to officially be in recession.

Although stronger than expected housing finance figures were also released this week, the Reserve Bank is still expected to cut the official cash rate by at least 50 basis points when it meets next month. This would bring the cash rate down to 3.75 per cent.

The Bank has moved aggressively to cut rates since September last year in an effort to shield the economy from the worst of the global financial meltdown. Rates have fallen from a high of 7.25 per cent in March last year to their current level of 4.25 per cent. Another rate cut of at least 50 basis points is expected in March, although this could be even larger if the weak economic data continues.

Infochoice.com.au