Australian unemployment has been falling but it may not remain that way for long

Sean M. Haffey /Getty Images)
  • Australia created over 270,000 jobs over the past 12 months. Unemployment also sits at the lowest level since 2011.
  • Businesses are showing signs of scaling back operations, something that typically leads to slower employment growth and higher unemployment.
  • That also points to the likelihood that business investment may also weaken in the period ahead.
  • The RBA has acknowledged that a sustained lift in unemployment is one factor that could warrant a lower Australian cash rate.

Australia’s unemployment rate currently sits at 5%, the lowest level since 2011. Employment growth has also been firm over the past year, lifting by over 270,000 with most of those full-time roles.

That goes someway to explaining why the RBA has been reluctant to cut interest rates despite weak inflationary pressures and a pronounced slowdown in the Australian economy late last year.

However, like a growing number of economic indicators in Australia, the resilience in the jobs market may soon be about to come to an end.

This chart from the latest NAB business survey, along with a variety of other leading indicators, points to a lift in Australia’s unemployment rate in the months ahead.

NAB

It shows two things.

The first is capacity utiliation at Australian businesses, essentially what level of available capacity that firms are currently operating at. The ratio has been inverted by the NAB.

It’s only a rough reading of capacity being used across the country, taking into account trends at individual businesses and sectors, but the message it’s currently sending about the broader business sector is clear: the proportion of capacity being used is falling.

The second thing the chart shows is Australia’s unemployment rate going back to the start of 2016.

In a nutshell, where capacity utilisation goes, unemployment tends to follow, typically with a lag of around six months or so.

With firms, from a broad perspective, scaling back production, it suggests that demand for employees may soon start to weaken, pointing to the likelihood that unemployment will increase.

It also points to downside risks for business investment, a key pillar the RBA is relying upon to help support economic growth in the years ahead.

If the trends in capacity utilisation lead to a slowdown in hiring and weaker business investment as has typically been the case in the past, it will only increase the likelihood that the RBA may have to deliver a series of interest rate cuts this year, especially with momentum in the Australian economy already slowing sharply.

“The trend in capacity utilisation is worrying as it includes views on the use of both plant, equipment and labour, and has proven a useful lead indicator of unemployment in the past,” said Kaixin Owyong, Economist at the NAB.

NOW READ: Another leading indicator for Australian jobs growth is starting to keel over

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