Last week, the Australian Bureau of Statistics (ABS) released data suggesting Australia’s labor market is in good shape as we head towards Christmas.
Australia’s unemployment rate fell to just 3.4 percent in October, its lowest level since 1974.
The underemployment rate also fell to just 5.9 percent – almost its lowest level since 2008.
And the combined labor slack rate fell to just 9.3 percent, its lowest since 1982.
Separate data from the ABS also showed that wages rose 3.1 percent in the year to September, the strongest annual growth since March 2013; although not enough to keep up with inflation.
Although the Australian labor market is currently performing well despite the fall in real wages due to inflation, there is good reason to believe that these data represent a record high and that conditions for Australian workers will deteriorate sharply over the next year.
Aggressive RBA monetary tightening to slow job growth
As anyone with a mortgage already knows, the Reserve Bank of Australia (RBA) has aggressively hiked interest rates, raising the official cash rate (OCR) by 2.75 percent since May.
This is the fastest rate hike in Australia’s history and has caused the reference rate for discounted variable mortgages to rise to 6.20% from 3.45% in May.
As a result, average variable-rate mortgage repayments are up 37 percent from their level in April, before the RBA’s first rate hike. For a borrower with a $500,000 adjustable-rate mortgage, that means an $831 increase in monthly mortgage payments.
Almost every analyst is forecasting that the RBA will raise the OCR by another 0.25 percent in December.
From then on, opinions are divided on the RBA’s next steps. For example, the CBA expects the RBA to wait while the NAB expects another 0.5 percent tightening and ANZ and Westpac another 0.75 percent of rate hikes.
The table below shows how much variable mortgage payments would increase if the big four banks’ rate forecasts came true.
It’s important to note that the full impact of the RBA’s monetary tightening has yet to be felt, as an unusually large number of borrowers fixed their mortgage rates at around 2 percent over the past year. This cushions the initial impact of rate hikes, but also means that monetary conditions will tighten significantly in 2023 as many of these mortgages mature.
Therefore, if the RBA continues to rise, it will not only impact existing adjustable rate mortgage borrowers, but also a large number of fixed rate borrowers who may see their mortgage rates double or triple.
Conversely, consumer spending will slow significantly in the new year as tens of billions of dollars in household incomes are diverted towards mortgage payments, stifling both jobs and growth.
Record immigration will boost labor supply
While the economy will slow in response to the RBA’s aggressive monetary tightening, Australia’s labor supply will expand sharply in 2023 on record-high overseas net migration (NOM).
A key reason Australia’s unemployment has fallen to its lowest level since 1974 is because Australia has lost hundreds of thousands of migrants during the pandemic. As a result, many of the jobs created went to unemployed Australians rather than migrant workers.
As shown in the next chart, Australia’s working-age population today is around 430,000 fewer than it would have been had pre-pandemic migration trends continued.
The latest federal budget projects that will raise NOM to 235,000 in fiscal 2022-23 and beyond. This means Australia’s labor supply will grow strongly in a weakening economy, causing unemployment to rise and dampening wage growth.
There are already signs that NOM federal budget forecasts will be far exceeded as net arrivals for student and work visas rose to record levels in the September quarter.
The Albanian government also claimed last week that it will have reduced Australia’s “visa backlog” by nearly 400,000 by the end of this year and intends to clear the remaining 600,000-strong backlog as soon as possible.
The inevitable result is that over the next year Australia will see unprecedented levels of immigration and a large increase in the labor supply as the economy falters and job growth creeps up.
In turn, by the end of 2023 there will likely be sharp increases in unemployment and declining wage growth.
Effectively, there will be more workers fighting for fewer jobs and making less money.
Leith van Onselen is Chief Economist at MB Fund and MB Super. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
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