- The RBA is likely to keep its unemployment rate forecasts steady in next Friday’s Statement on Monetary Policy.
- However, Westpac chief economist Bill Evans says increased political uncertainty could give rise to a slowdown in Australia’s labour market.
- Evans said jobs growth slowed noticeably ahead of the last two federal elections, and the outcome of the next election is arguably even more uncertain.
Political risk ahead of the next federal election poses a key risk to the RBA’s view that Australia’s unemployment rate will hold steady, says Westpac chief economist Bill Evans.
The Reserve Bank of Australia is practically certain to hold interest rates at 1.5% when committee members convene for the monthly meeting on Tuesday.
Next week’s meeting will precede the bank’s quarterly Statement on Monetary Policy (SoMP) on Friday, when it will issue an updated set of economic growth projections.
Evans said the RBA is likely to maintain its “upbeat” forecast of 3.25% GDP growth for the year ended 2018. And he expects the bank to hold its forecast for the unemployment rate steady, in line with the current December forecast of 5.25%.
He also noted the RBA’s forecasts for working aged population growth are 1.7% for 2018 and 1.6% for 2019.
But if recent electoral history is anything to go by, a labour market slowdown could be on the cards.
And it’s all to do with the current stage of the political cycle, given that a federal election will have to be called by no later than May next year.
This chart from Evans tells the story.
“Note how over the 9 month ‘windows’ around election campaigns, six-month annualised employment growth collapsed,” Evans said.
He attributed the falls to an increased degree of caution from Australian businesses, as they await political clarity before pulling the trigger on investment decisions.
“It is true that such a pattern has not been apparent during some previous election campaigns, but the evidence from 2013 and 2016 must be disturbing,” he said.
And Evans added that prior to the previous two federal elections in 2013 and 2016, the election result was arguably more certain than it is now.
“For the 2019 election the polls, the by-election results, and the government’s slim one seat majority all point to considerable political uncertainty,” Evans said.
As a result, a repeat of the caution showed by corporate Australia in previous years “cannot be ruled out”.
Evans said he doesn’t expect the RBA to factor in political risk when it releases its new projections next Friday.
However, recent political history suggests there’s “significant uncertainty about the sustainability of the RBA’s employment forecasts, and hence their expectation of above trend economic growth”, Evans said.
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